Unit- 4

KINDS OF INSURANCE

Prepared By: YT 1
4.1 Introduction
As it is discussed in the previous units, there are large
numbers of risks that surround our day- to-day life or
our business operation. Among these only few have got
insurance coverage. The diversified nature of the
insurable risks also demands different provisions and
conditions, resulting in large number of insurance
contracts or policies. In this unit, we will discuss the
different type of insurance contracts (property and life)
how ever; more time will be devoted in the discussing
life insurance contract, its features and provisions and
condition that apply to it.

Prepared By: YT 2
4.2 Classification of Insurance
Insurance can be classified as follows;
1. Life insurance Vs Non- life Insurance
A. Life insurance
Life/ personal insurance sell on the individual persons.
Human lives are insured under this insurance. It also
includes supplementary policies that sells to protect
households against a loss of earning from disability
(disability insurance); injury or incurring a disease (health
insurance and living a certain period (endowments,
annuities, and pensions).
B. Non- Life Insurance
Non-life/property/ general insurance sell insurance to
protect property. Non- life insurance companies’ sell
polices to protect households and firms from the risks of
theft, fire, accident, or natural disaster. Prepared By: YT 3
4.2 Classification of Insurance (Cont…)
It includes insurance to cover
1. Property losses (i.e., damage to or destructions of
homes, automobiles, business, aircraft, etc)
2. Liability losses (i.e., Payments due to professional
negligence, product defects, negligent automobile
operation etc.
3. Workers compensation and health insurance payments.

Prepared By: YT 4
4.2 Classification of Insurance (Cont…)
2. Social Vs Private Insurance
A. Social Insurance
 The social insurance is meant to protect and uplift the weaker
sections of the society and may be in different forms like pension
plans, disability benefits, unemployment benefits, sickness
insurance, industrial insurance etc. premium under such insurance
schemes is paid by the government or the employers or by both.
In some cases the employees or beneficiaries also contribute their
share of the premium.
B. Private Insurance
 Private insurance emphasizes individual actuarial equity, i.e.,
premiums reflect the expected value of losses. Most private
insurances are voluntary although the purchase of some insurance
is required by low. A major part of social (governmental
insurance) is involuntary, i.e., it is required by low to be
purchased by certain groups under certain conditions.
Prepared By: YT 5
4.2 Classification of Insurance (Cont…)

3. Direct insurance Vs indirect Insurance

 Direct Insurance: is life or non- life insurance sold to
public and to non-insurance commercial and individual
enterprises.
 Indirect Insurance (Re-insurance): is sold by direct
writing insurers to hedge their own portfolio.

Prepared By: YT 6
4.2 Classification of Insurance (Cont…)
The difference between life insurance and general insurance (non- life
insurance).
The following are some of the factors that differentiate life insurance from
property (general insurance);
A. Risk
◦ The occurrence of risk (death) in life insurance is certain. But in other
insurance the occurrence of the risk insured is uncertain.
B. Procedure
◦ Life insurance requires medical certificate where as survey is made
before a property is insured.
C. Premium and Amount
◦ Since it is difficult to express life in monetary terms the amount insured
depends on the personal requirements of the insured. The insure also
charges the insured a premium determined according to the age and
heath condition of the insured. But in other forms of insurance the
premium is determined according to the risks involved. The amount of
the policy in the property insurance can be taken up to the value of the
Prepared By: YT 7
property .
4.2 Classification of Insurance (Cont…)
D. Insurable interest and transfer of the policy
 Insurable interest principles is applicable to both life and non- life insurance.
However, the time of its requirement may vary. In other words, insurable interest
must exist at the time of purchase of a life policy. In marine police such interest
must exist at the time of loss and in fire insurance both at the time of taking the
policy and at the time of loss. A life insurance policy can be transferred either by
assignment or by nomination. But in other insurances. The financial right can be
transferred only by assignment with prior permission of the insurer.
E. Contract
 General insurance contracts are contracts of indemnity, whose purpose is to
recover the loss. But life insurance is not a contact of indemnity and and
subrogation. The amount of compensation is the insured sum in life insurance
and life insurance is never a protection against partial loss as compared to the
other forms of insurance.
F. Elements and purposes of Insurance
 Life insurance contains both elements of protection and savings (investment).
However, in other insurances the investment part is totally absent. Its purpose is
simply the protection of the property.

Prepared By: YT 8
 4.2 Classification of Insurance (Cont…)
4. Double Insurance Vs Reinsurance
Double insurance:
It implies that the subject matter of insurance has been
insured with two or more insurers or with the same
insurer under two or more policies. In this case of life
insurance, the insured can insure his life with many insurers as
he likes for any amount and up on maturity of the policies he
can collect amount of all policies from all insurers. This is
possible because life insurance’s not contract of indemnity
since life is priceless. In the case of property insurance, this
situation is handled by the principle of contribution and
indemnity.

Prepared By: YT 9
 4.2 Classification of Insurance (Cont…)
Reinsurance
It is a process by which an insurer transfers a part of his risk
on a particular insurance by insuring it with another insurer
or other insurers. It means insuring against by the insurer of
a risk already insured. It is a contract between two insurers and
the original contract or the insurer of a risk already insured. It is
a contract between two insurers and the original contract or the
insured is not at all affected by it. In this case there are two
contracts on the same subject matter. These are;
The contract between the original insurer or direct insurer and
the owner of the subject matter or the original insured.
The contract between the original insurer (re- insured,
ceding company or principal insurer) and the reinsures
(guaranteeing company).
In the event of loss, the original insurer collects the insured
some from the re- insurer and then settles the less value in full
to the original insured.
Prepared By: YT 10
 4.2 Classification of Insurance (Cont…)
The major differences of double insurance and re-insurance are
1. The reinsurance business is entered into by the original insurer with
other insurers. But in double insurance the insured gets the same
subject matter insured with more than one insurer or under more that
one policy with in the same insurer.
2. In double insurance the insured can claim only his actual loss from
each of the insurers up to the amount insured with them. But in re-
insurance the insured cannot claim any part of his loss from the
insurer.
5. Over-insurance Vs Under-insurance
When the insurance is taken for more than the value of the property under
one or more policies, it amounts to over- insurance, where as when
insurance is purchase for values less than the value of the property, it
amounts to under insurance. Over insurance is not advantageous because
only the actual loss subject to the value of the property is claimed from
the insurer when the risk occurs.

Prepared By: YT 11
 4.3 Life Insurance
 Life insurance is one of the most common form of insurance.
It has gained greater acceptance all over the world. Following
the liberalization of the economy of the country in 1993,
private insurance companies has emerged in Ethiopia; this is
encouraged and motivated the society to use life insurance
policies.
 The main purpose of life insurance is financial protection of
the dependents of the insured and saving for an old age, to
cover personal loan and tuition fees for education expense.

Prepared By: YT 12
 4.3 Life Insurance (Cont…)
4.3.1 Definition
 Commercial code of Ethiopia defines life insurance as a
contract by which the insurer, for a certain sum of money or
premium proportioned to the age, health, profession, and
other circumstances of the person whose life is insured
engages that, if such person shall die with in the period
limited in the policy, the insurer will pay according to the
terms specified there of, to the person in whose favor such
policies are granted.
 From this definition we can consider the following important
features of life insurance.
1. Life insurance, like other insurances, is a contract
between the insurer the insured whose life is insured
or some one who has an insurable interest.
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 4.3 Life Insurance (Cont…)
2. Its purpose is financial protection of the dependents of the
insured with financial compensation amounting the sum
assured if the insured die while the policy is in force. Of
course, life insurance may also be engaged in encouraging
savings to accumulate an educational fund that could be used
to pay tuition fees for children when they join higher
education, and to settle an outstanding balance of a debt.
3. The insurance charges premium based on age, sex, health
condition, occupation and other criteria.
4. Life insurance policy gives protection against special types of
risks i.e., death whose occurrence is certain. The uncertainty
is related to the causes and time of death.
5. The benefit, financial compensation up on death is
determined in advance based on the decision made by the
insured and reasonableness of the premium.
Prepared By: YT 14
 4.3 Life Insurance (Cont…)
6. The insured and policy owner may be different. For example,
an individual may insurance the life of another person, if,
he/she has a financial interest.
7. Life insurance is not strictly a contract of indemnity. Because
life is priceless. For this reason, if the insured buys more than
one policy all of the insurance companies will indemnify
fully.
8. The probability of claim for compensation increases with the
passage of time due to insured s deteriorating health
conditions as they grow old.

Prepared By: YT 15
4.3 Life Insurance (Cont…)
4.3.2. Kinds of life insurance policies
 According to the duration. Life insurance policies may be of the
following kinds.
1. Whole- Life Policies/Contracts
 This policy provides financial protection to the dependents of
insured up on the event of his death. The policy will mature
for payment only on the death of the assured or as an
exception on the death of his attaining 100 years of age. In
other words, the insured can. pay premium as long as he/she
lives or payment of premium may be made for a specified
number of years such as up to retirement date.
Whole life policy provides permanent protection to the insured
s dependants in the event of death and it also allows for the
accumulation of savings over the life of the insured.

Prepared By: YT 16
4.3 Life Insurance (Cont…)
A. Ordinary whole life policy
 Under ordinary whole life policy, also known as straight life insurance, the
same amount of premium is to be paid at a regular interval, usually annually
until the death of the assured or until the achievement of the specified age limit
i.e., 100 years. This policy provides life time or permanent protection at a
lower cost/premium.
B. Limited – payment whole life insurance
 Under the limited payment whole- life policy the premiums are paid for a
limited or selected period of time, which is determined in advance (say 10, 15,
30 years or up to the retirement age of the insured). But the policy will mature
for payment only on the death of the assured. That means, after the expiration
of the specified period, the policy is said to be paid up and no more premium
payment is required to keep the policy in force until the death of the insured.
 Limited payment life insurance is desirable when new intends to stop premium
payments after reaching a given age level, usually up on retirement, but wants
to keep the policy in force until his/her death.
 The insured pays a higher premium than he would be required on ordinary life
plan .because premium is paid only for a limited number of years in the limited
pay insurance plan.
Prepared By: YT 17
4.3 Life Insurance (Cont…)
C. Single- payment whole life policy
 In this policy premium is paid in a single installment at the purchase
of the whole life insurance. This mode of payment is not preferred by
most buyers.
 Both the premium payments have the same goal. They reach at the
same destination. However .the straight pay is better for the insured if
the person dies early because she/he pay smaller amount as compared
to the other two modes of payment. On the other hand, if the person
terminates the contract, the single pay provide a higher cash value.
2. Term Insurance
 The term – insurance is issued to provide death benefit to the
beneficiary if the insured dies with in the specified time period stated
in the policy. This police matures for payment only on the death of the
insured with in the term period, but if he/she survives the policy will
expire and nothing is payable to the insured. The policy provides only
temporary protection and has no saving element another important
feature of this policy is that since it is relatively low.
Prepared By: YT 18
4.3 Life Insurance (Cont…)
 Term policy is issued for short term ranging from few
months to a specified number of years such as 10 years, 15
years, 20 years etc.
 This insurance also often used when maximum coverage is
desired at a minimum premium payment. The following are
the different types of term insurance policies.
i. Level term policy
 The policy provides a constant sum assured (amount of
money payable in the event of death) though out the term of
the policy. For example, under a 20 year term policy of br.
50000, the amount of payment / compensation to the
insured s beneficiaries will be birr50000 if the insured dies
at anytime during the term of the policy.

Prepared By: YT 19
4.3 Life Insurance (Cont…)
ii. Decreasing (or diminishing) Term policy
 In this policy the amount of claims to be paid to the insured decreases
periodically. These policies are usually issued to borrowers of money and the
amount of the policy payable at the end of each year is automatically reduced
and is equal to the outstanding loan which will be paid if the insured dies
before the end of the term. This is also known as mortgage- Redemption Policy.
 These types of policies provide financial protection to the policy holder
(creditors) and the dependents of the debtor who are supposed to cover the debt
otherwise. Premiums for such type of policies are paid at the beginning of the
policy.
The following are types of decreasing term policies
A. Mortgage Protection Insurance
 Mortgage protection insurance is issued in connection with real estate loans
made by banks. It gives financial protection to the creditor and the dependents
of the debtor of the outstanding mortgage loans in the event of accidental death
of the debtor. Since a mortgage loan is paid on an installment basis, the
outstanding loan decrease over time. As a result the sum assured decreases and
finally becomes zero. This is why it is called decreasing term insurance

Prepared By: YT 20
4.3 Life Insurance (Cont…)
B. Credit life insurance
◦ Credit life insurance is issued to give protection to a
lender/borrower s dependent of the unpaid balance of a credit
transaction if the borrower s dies before setting the unpaid
balance of his debt.
C. Credit Cooperative insurance
◦ This policy is issued to protect savings and credit associations
from facing a financial losses on the loans they provide to their
members, due to death before setting his/her debt.
iii. Renewal (Renewable) Term policy
◦ This is a term policy that can be renewed after the expiry of the
term with out medical examination but at a different rate of
premium applicable to the age level reached at the time of
renewal .for instance, a one year term policies require renewal
every year. Similarly, a10 year term policy may be renewed up
on its maturity. Prepared By: YT 21
4.3 Life Insurance (Cont…)
iv. Convertible Term Policy
 Under the convertible term policy an option is available to the insured
to convert it into whole life or endowment life police with out going in
for new medical examination .however, the premium may be adjusted
either at the attained age at the time of conversion of the term policy or
using the initial policy issued.
 To make the conversation process simple, the following requirements
are to be met up on conversation.
1. There will not an increase or decrease in the sum assured.
2. Conversion will have to be made with in a specified period, usually
before the maturity date of the term policy.
v. Non- convertible term policy
 Under this non- convertible term policy an option is not available to the
assured to convert into other forms of life insurance contracts. The
police expire up on maturity. However, it gives the policy holder the
option to renew it up on expiration.
Prepared By: YT 22
4.3 Life Insurance (Cont…)
vi. Increasing Term Contract
 Under this policy the sum assured can be arranged each year to
correspond to a need of the insured that increases periodically.
 On the basis of mode of premium payment, term insurance policies
can also be classified as.
a) Level Premium Policy or Regular Premium Policy- the
level –premium policy requires the payment of premium
regularly in equal installments at fixed intervals throughout
the policy such as monthly, quarterly or yearly.
b) Limited Premium Policy- the payment of premium is
limited to a period of attaining certain age of the assured,
say retirement age.
c) Single premium policy- single premium policy requires the
payment of all the premium only once in a lump sum at the
policy is issued.
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4.3 Life Insurance (Cont…)
3. Endowment Insurance Policy
 Endowment policy is issued for a fixed period (endowment
period) and premium is payable during that period only.
This policy provides protection of the beneficiary of the
insured if he/she dies within endowment period. In
addition, it provides for the payment of the face value of
the policy to the insured if he/she is living at the end of the
policy period.
 This period is known as a modified form of whole life
insurance policy. The period of this policy is shorter than
that of whole life insurance and hence the premiums are
higher for the same age level. In general, the shorter the
endowment period, the higher the premium will be.

Prepared By: YT 24
4.3 Life Insurance (Cont…)
 One important advantage of this policy over that of term
policy is that the insured can terminate the contact at
anytime and can collect the cash value in a lump sum
which normally becomes positive after two or more years.
The policy , there fore, has dual purpose; financial
protection and accumulation of funds for possible
contingencies in the future. Unlike the term insurance
whose purpose is only protecting the insured s dependents
up on the death of the insured, endowment policy helps
insured s to save money for some other purposes.
 Another advantage of endowment policy is that it provides
the assured with loan facility after the policy acquires cash
value.

Prepared By: YT 25
4.3 Life Insurance (Cont…)
The following are the different types of endowment policies.
 Ordinary Endowment Policy
 This policy will mature for payment on the survival of the
assured on the date of maturity or on the date of his death with
in the endowment period. This means payment to the insured or
his dependents is certain whether or not he dies before the
policy matures or survives the endowment period.
 Pure Endowment policy
 The pure endowment policy will mature only if the insured
person survives the endowment period. In other words the sum
assured is payable only if the insured survive beyond the
endowment period. In this case, payment to the insured is
uncertain. The objective of this policy is to benefit the insured
himself rather than his dependents. As a more of an investment
than protection.
Prepared By: YT 26
4.3 Life Insurance (Cont…)
4. Supplementary Insurance policies
 Supplementary policies as their name suggests are issued
only in conjunction with the main life insurance policies
i.e., term whole life or endowment for additional premium
for each contract. Supplementary policies also known as
RIDERS. The supplementary contracts. Include;
 Supplementary accident insurance
 Total and permanent disability benefit
 Supplementary group accident insurance.

Prepared By: YT 27
4.3 Life Insurance (Cont…)
4.3.3. Provisions of life insurance
 The policy conditions and provisions in life insurance that must
be agreed by all parties of the contract include the following.
1. Contract documents; the life insurance contract requires
documents such as the proposal form, the policy term, the
medical report and any other supplementary contracts.
2. General information; the general information relates to the
granting of insurance which is based on the following factors
for selection of lives.
o The build; it relates to the present condition of health and physical
build, such as height, weight and other measurements of the life to be
insured.
o Physical condition; the medical examiner s report will reveal the
physical condition of the life to be insured.
o Personal history; relates to the records of illness suffered, accidents met
with, surgical operations undergone , etc by the life to be insured.
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4.3 Life Insurance (Cont…)
o Habits and temperaments
o Moral hazards
o Hobbies or avocations
o Family history
o Occupational hazard
o Age, sex
o Residence and the like
These are the factors used to assess the insurability of individual or
group lives.

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 4.3 Life Insurance (Cont…)
3. Payment of premium; one of the responsibilities of an
insured is to pay the premium agreed at the time of the
contract. Payment can be made in different arrangement
such as annually, semi-annually, quarterly or monthly. In an
annual premium payment arrangement, the insured is
expected to pay in advance. However, the insured have the
following privileges;
 Grace period; the insured will usually receive a notice of reminder for
the payment of premium on the due date for the payment of yearly,
semi-annually or quarterly premium not for the monthly payment
premium. Usually 30-day grace period is given to the insured. If death
occurs with the grace period, the total sum assured less the outstanding
premium will be payable to the beneficiary.

Prepared By: YT 30
4.3 Life Insurance (Cont…)
 Non-forfeiture options; as explained earlier, the cash surrender value
of a life insurance contract (whole life and endowment) is the amount
the policy owner could receive if the policy is surrendered to the
insured prior to the insured s death. If the policy owners discontinues
payment of premiums. He/she can use the cash value to keep the
policy in force under the automatic premium loan provision. The
insurer will allow the policy to continue automatic premium out of the
net surrender value.
 Loan provision; it permits the policy owner to borrow against the
policy s cash surrender value. Methods for determining the upper
limit on the borrowed amount vary among policies.

Prepared By: YT 31
4.3 Life Insurance (Cont…)
4. Policy conversions; a policy change clause permits the
insured to convert the policy with out demonstrating
evidence of insurability to some other form requiring a
higher premium.
5. Restrictions; A life policy is subject to the following
restrictions;
◦ Occupation; all policies are free from all restrictions as travel,
residence and occupation except where a propose has at the time of
proposal an intention to take up a hazardous occupation or the
propose is a student. In all such causes, policies will be issued subject
to a suitable endorsement and, if necessary, extra premium will be
charged to cover any additional risk, if any.

Prepared By: YT 32
4.3 Life Insurance (Cont…)
◦ Suicide- if the insured commits suicide within one year of taking
insurance, noting is payable to the beneficiary. In the absence of a
suicide clause, adverse selection could occur when a person
contemplating suicide takes out a large amount of coverage shortly
before committing suicide. The suicide clause makes this type of
adverse selection unlikely.
◦ Proof of Age – as the premium is charged on the basis of age of the
propose, proof of age by any one of the prescribed certificates should
be submitted a long with the proposal invariably where the age of the
life insurance at entry is found to be lower than the age given in the
proposal form, the premium shall be payable at the correct age and the
excess premium already collected will be refunded. On the other
hand, if it is higher than the age given in the proposal form, the
difference between the premium for the correct age and original
premium already paid will be collected with in a certain interest rate.

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4.3 Life Insurance (Cont…)

4.3.4 Life Insurance Premium Determination

 The determination of a price for insurance is a complex
activity and involves the incorporation of a mathematical
analysis into competitive business decision processes. This
price is known as premium, which may be paid annually,
semi – annually, quarterly or monthly.
 Life insurance premium are influenced by the following
major determinants;
1. Expected mortality rates in the insured population. The
morality table can be prepared from the census records or
from the records of the first class insurance companies.

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4.3 Life Insurance (Cont…)
2. Investment income earned by the insurer on invested premium
income- interest factor. Life insurance is a long term contact and
premium so received is invested in securities or deposited in a bank
yielding interest. Such income may help reduce the cost of
insurance. So interest – earning is also a factor for calculating the
premium rate.
3. Expenses incurred in operating an insurance enterprise and in
providing insurance – related services. The expense includes policy
expenses. Commission to against, cost of preparing policy,
administrative and local charges loaded, and other service charges.
4. Other factors required to determine premium rate include; age and
sex of the insured, period of the insurance policy, and sum assured.
We will illustrate using a hypothetical example how these
determinants are incorporated into rates for life insurance coverage.
But first let us discuss the following terms.

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4.3 Life Insurance (Cont…)

o Net Premium; the net premium is a rate determined based on the

mortality and interest rates only. No consideration is given for expense
incurred and the future contingencies. The net premium is an amount of
money collected by the insured to meet only death claims.
o Gross Premium; gross premium includes all the insured s costs of
running the business known as loading. These costs include operating
expenses. Commissions, advertisement expenses, etc. so if these
expenses and the expected profit to policy issuer are added to net
premium, it becomes gross premium, also known as the office premium.
It is a premium the policy holder actually pays to the insurer to keep the
policy in force.
Gross premium = Net Premium + Loading
 Loading: Loading of the premium refers to the process of adding
expenses to the net premium. In the next section of this unit, we
will illustrate how to determine premium for the life insurance
using a hypothetical exercise.
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4.3 Life Insurance (Cont…)
Illustration 1;you are given the following information
1. According to the 1995 Ethiopian central statistic office of mortality
table, out of an initial population size of 1,500,000 male people of
Bahir Dar city, 100,000 live at the age of 40.
2. the number of people expected to die at age 40 is 500. this means
that the probability of death at age 40 will be 500/100,000= 0.005or
0.5%
3. Assume that Ethiopian insurance cooperation issued a one – year
term insurance to these entire male individuals aged 40 for death
benefit of birr. 10,000each.
4. Death claim is to be paid at the end of the term and premium is
collected at the beginning of the policy.
5. interest rate is 3%
6. Each insured is assumed to bring the same level of risk to the group.
Required; based on the information given, how much premium the
insurer should charge each insured? (Net single premium)
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 4.3 Life Insurance (Cont…)
Solution;
o Expected Death Benefit (Amount) = (No of insured expected to die)x (the sum assured death
benefit/insured)
= 500x 10,000
= birr 5,000,000.00
o This is an amount expected to be paid by EIC at the end of the one- year term. The question here is how much
money EIC need to collect from premium payments to satisfy this death claim? The answer is the present
value of the future death claims, because money has a time

Present value (PV) = Amount (A) x (1+r)-n

 PV = A = A (1+r)-n
(1+r) n where; PV= Present Value
A= Amount (Future Value)
r=
Interest Rate per period
n= number of periods
Given;
 r= 0.03=3%
 A= 5,000,000
 n= 1 year
 PV of claims= A (1+r)-n

= 5,000,000 (1.03)-1
= Br,4,854,368.93
Prepared By: YT 38
4.3 Life Insurance (Cont…)
 This (Br,4,854,368.93) is the total net premium that EIC is going to
collect from the insured’s at the beginning of the policy. The net
single premium (NSP) can be calculated by dividing the present value
of premium collected by the number of insured at the age of 40.
NSP= PV of the expected total claim
No. of policy holders (insured)
= 4,854,368.932
100,000
= 48.54
 The amount that EIC will collect from each insured can Br. 48.54 and
total of Br. 4,854,368.93 at the beginning of the term which will grow
to Br. 5,000,000 in one year at 3% interest rate. The 48.544 Birr does
not including Loading. The insurer may charge a fixed sum of money
or certain percentage of the net premium. For example , if the insurer
charges each insured 20 % of the net premium as an additional cost,
the gross premium will be Birr 48.544 + 0.2(48.54)= 58.25Br.
Prepared By: YT 39
4.3 Life Insurance (Cont…)
Illustration 2;
based on the above information and the following mortality table
answer the questions that follow;
Year Age No. of living Number of dying
1. 40 100,000 500
2. 41 99,500 750
3. 42 98,750 1,250
4. 43 97,500 1,500
5. 44 96,000 ---
Assume that the 100,000 population has purchase a 4 year term
insurance at the age of 40 for a sum assured equal to Br. 10,000.
Required; determine
A. the net single premium (NSP) of term insurance
B. the net level premium (NLP) of Term insurance
C. the net level premium of pure and ordinary endowment
D. the total gross premium, if 40% of the gross premium is the cost of running the
business (loaded amount). Prepared By: YT 40
 4.3 Life Insurance (Cont…)
A) First we can calculate the probability of dying and the expected death claims in each of the
years during the term of the policy as follows:
B) As it is discussed above, the insurer will not collect birr. 40,000,000 from the insured's. Rather
it will collect the present value of the claims. The calculate is shown as follows;
No. Age No. of Prob. Amount of Expected PV* PV of Claim Annual
Dying of Policy (2) Death Claim Factor C = (axb) Net
(1) Dying (1x2) at 3% Premium
(b) **
1 40 500 0.005* 10,000 5,000,000 0.9709 4,854,500 48.55

2 41 750 0.0075 10,000 7,500,000 0.9426 7,069,500 70.70

3 42 1250 0.0125 10,000 12,500,000 0.9151 11,438,750 114.39

4 43 1500 0.015 10,000 15,000,000 0.8885 13,327,305.72 133.27

Total Expected Claims 40,000,000 36,690,055.7 366.91

 Probability of Dying = No. of Dying = 500 = 0.005

No. of Living at the Age of 40 100,000
 Note: *Present Value of 1 Birr = 1 = 1 = (1.03) -n
(1+r)n (1+0.03)n Prepared By: YT 41
 4.3 Life Insurance (Cont…)
 So when n=1, the present value of 1 birr is (1+0.03)-1 = 0.9709 and
when n=2, the present value is 0.9426 and so on as shown in the
table above in column b.

 ** Annual premium is calculated by dividing the present value by

the number of insured (i.e. , 100,000). For example,
4,854,500/100,000=48.55. when we add the annual premium per
insured of the four years, we can find the total Net Single
Premium, which is equal to Br.
366.91(48.55+70.70+114.39+133.27) or we can divide the total
present value by the number of insured at the beginning of the
policy period, which gives:
Net Single Premium= 36,690,055.7
100,000
NSP = 366.90
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4.3 Life Insurance (Cont…)
 It is also possible to use actuarial formula to calculate the net single
premium. The following variables are used in the calculation of the
NSP.
 NSP= dx dx + 1 d x+t
S lx +S lx + ……...+ S Lx
(1+r)1 (1+r)2 (1+r)t
 Where: t= time in years
x= Age at a time of insurance purchase
Lx= number of people living during age x
dx= number of people dying during age x
Px= probability of dying during age x
1- Px= probability that an individual survive at age x
S= sum assured
r= interest rate
 Using this formula NSP of the above exercise is computed as of the
follows:
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 4.3 Life Insurance (Cont…)
 NSP= 10,000 500/100,000 +10,0000 750/100,000 + 10,000 1250/100,000 + 10,000 15000/100,000
(1.03)
1
(1.03) 2
(1.03)3 (1.03)4

= 48.54 + 70.70 + 114.39 + 133.27

= 366.90

B) Determine the Net Level Premium (NLP): NLP is an equal annual premiums paid by the
insured. Some life insurance policies may allow the insured’s to pay annual premiums of equal
size. In this case, all the policy holders may not pay all the annual level premium. Because
some of them are expected to die before the end of the policy period. Another point here is that
the insurer will collect limited amount of premiums to invest at the beginning of the policy. As
a result the annual net level premium paid by the insured under this arrangement is greater than
the single premium paid at the beginning of the policy.
The NLP is calculated as follows:
1. Assumed each insured pays constant premium of Br. 1 throughout the term of
the policy.
2. Determine present value of Br. 1 collected from each insured.
3. Divide the total present value of Br. 1 by the number of insured's to arrive at the
present value of Br. 1 premium payment per insured.
4. Divide the NSP by the present value of Br. 1 premium payment per insured.
This gives you the net level premium. The following next tables shows the calculations.

Prepared By: YT 44
4.3 Life Insurance (Cont…)
Year Age No. Of Br. 1 PV of Br. 1 to be PV of Br. 1
insured’s premium collected at the premium
paying collected beginning of the
premium from each year
insured
1 40 100,000 100,000 1 100,000.00
2 41 99,500 99,500 0.9709 96,604.55
3 42 98,750 98,750 0.9426 93,081.35
4 43 97,500 97,500 0.9151 89,226.31
Total 378,912.21

 PV of 1 Br. Premium = 378,912.21

 Payment per insured 100,000
= 3.789 Br.

Prepared By: YT 45
4.3 Life Insurance (Cont…)
 Therefore,
 NLP = NSP = 366.91 = 96.84 Br.
PV of Br. 1 premium per insured 3.789
Therefore, each insured is expected to pay Br. 96.84 every year for four
years in order to get coverage of Br. 10,000 in the event of death.
Actuarial formula can be used to find the present value of Br. 1
premium payment. The formula is given as follows:
PV of Br. 1 premium payment = ∑PL . Pv factor
 Actuarial formula can be used to find the PV of Br. 1 premium
payment. The formula is given as follows:
◦ PV of Br. 1 premium payment = ∑ PL xPV factor
◦ Where: PL = Probability of Living
◦ Pv factor = Present Value factor
= (Lx/Lx) + (Lx+1/Lx) + …. + (Lx+t-1/Lx)
(1+r)0 (1+r)1 (1+r)t-1

Prepared By: YT 46
4.3 Life Insurance (Cont…)
 Accordingly, the PV of Br.1 annual premium payment for four periods
become:
 PV of Br. 1 premium payment =
100,000 99,500 98,750 97,500
100,000 (1) + 100,000 (0.9709)+ 100,000 (0.9426)+ 100,000 (0.9151)

= 1+ 0.966+ 0.9308+ 0.8922

= Br. 3.789
 Note: The total present value of premiums collected from the insured’s
will be the same whether net single premium or net level premium is
charged.

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4.3 Life Insurance (Cont…)
C) Pure Endowment
 The NSP and NLP for pure and ordinary endowment using the information
given above can be calculated as follows:
Pure Endowment Policy
 Under the pure endowment policy, the insurer expects to pay the face value
of the policy, Br. 10,000, if the insured survives the policy period.
Accordingly, it would be necessary to determine the probability of survival
for the insured.
 Survival Rate= Number of Persons Living at Age 43 (End of the Policy)
No. of Persons Living at Age 40 (Beginning of the
Policy)
 Out of the 100,000 people insured at the age of 40, 96,000 of them are
expected to survive at the end of the policy period. Then, the probability of
survival becomes:
Probability of Survival= 96,000 = 0.96 = or = 96%
100,000

Prepared By: YT 48
4.3 Life Insurance (Cont…)
 The NSP for Pure Endowment is calculated as:
NSP= Sum Assured x Probability of Survival x Present Value Factor
NSP = 10,000 x 0.96 x (1.03)-4
= 10,000 x 0.96 x 0.8885
= Br. 8529.48
 NLP for Pure Endowment can also be calculated in a similar fashion as
of NLP for Term Insurance.
Net Level Premium = Net Single Premium
Present Value of Br. 1 Premium per Insured
= 8529.48
3.789
= 2251.12

Prepared By: YT 49
4.3 Life Insurance (Cont…)
Ordinary Endowment Policy
 Under this policy, the determination of the NSP should reflect the
probability of death of the insured within the policy period and its
survival to the end of the policy period. This is because payment to the
insured is certain whether or not the insured dies before the policy
matures or survives the policy period. As a result, the net single
premium of an ordinary endowment policy and the NSP of the term
policy for the same period.
 Therefore, NSP for the above illustration is calculated as:
NSP = NSP for Term + NSP for Pure Endowment
= 366.69 + 8529.48
= 8,896.17

Prepared By: YT 50
4.3 Life Insurance (Cont…)
D) If Loading = 40% Gross Premium, then,
Net Premium = 60% of Gross Premium
Goss Premium = Net Premium
60%
1. Gross Single Premium of Term = Net Single Premium = 366.69 = Br. 611.15
0.6 0.6
Br. 611.15 is an actual amount that the insured should pay to the insurer at
the beginning of the policy.
2. Gross Level Premium of Term = Net Level Premium = 96.84 = Br. 161.4
60% 0.6

Prepared By: YT 51
4.4 Non-Life Insurance Policies
 Insurance is a financial tool into which many contribute and
out of which the few who suffer losses are compensated. In
other words, small contribution from many insured will pay
the large losses of the few. Insurance can be called a
safeguard of any business enterprise, i.e., factory may burn,
a ship may sink, money may be lost through deception, but
provided there is adequate protection, one may not be left
destitute as a result of any unfortunate events, because
business will not suffer as prompt payment of claim ensures
that a man can continue in the previous section, we have
discussed life insurance, its distinguished characteristics,
and type of life insurance contracts. In this section we will
briefly discuss types of non- life insurance contracts, their
exceptions and subject matter insured under each type of
contract.
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4.4 Non-Life Insurance Policies
4.4.1. Property and Liability Insurance
Property Insurance
 Property insurance contracts may be written to cover either real
property or personal property, or both. It is a contract of indemnity.
Typically, the contract reimburses loss as defined in the terms of
coverage.
Liability Insurance
 Liability insurance reimburses amounts that insured person become
legally obligated to pay as a result of injury to others or damage to
their property. Insurance may be written to cover liability arising
from specially identified source of liability or more broadly; to
provide comprehensive coverage, comprehensive liability insurance
covers all sources of liability except those specifically excluded.
Until recently, most liability insurance contracts usually give
coverage to (1) bodily injuries and (2) property damage with some
limited amount of coverage.
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4.4 Non-Life Insurance Policies
4.4.2. Major Types of Insurance Cover
For example; the Ethiopian insurance (EIC) provides
life, property and liability insurance policies. The
general insurance policies include;
1. All risks
2. Aviation(cargo and hull)
3. Burglary and house breaking
4. Bonds
5. Consequential loss (business interruption)
6. Depositors personal accident
7. Fidelity guarantee
8. Fire and allied perils
9. Marine (cargo and hull)
10. Motor (commercial and personal)
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4.4 Non-Life Insurance Policies
11. Engineering
 Boiler insurance
 Contractor s plant and machinery
 Machinery breakdown etc.
12. Personal/group personal accident
13. Money
14. Plate glass
15. Product liability
16. Professional indemnity
17. Public liability
18. Workmen s compensation
19. Other non- life insurance

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 4.4 Non-Life Insurance Policies
1. Fire Insurance
 The basic fire policy covers the insured property against
loss or damage by fire or lightning, as result of the
principle of proximate cause, the following
losses/damages are also covered by fire or lighting.
• Property damaged by water or other extinguishing agents
used for extinguishments purpose.
• Damage done by fire brigade in the execution of its duties.
• Property blow up on prevent a fire spreading.
 The property insured under fire policy are;
 Buildings(office, hospitals, warehouses, factories etc)
 Machinery, equipment , furniture etc
 Stocks(inventory stored in a warehouse)
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 4.4 Non-Life Insurance Policies
2. Machinery insurance
 It was developed to give cover against the economic loss suffered as the
result of damage or destruction of machinery due to accidents. In this
policy all types of machinery, plant mechanical equipment and apparatus
may be covered. It includes the following;
◦ power generating units(boilers, turbines, generator);
◦ power distribution plant(transformers, how and low tension
equipment)
◦ Production machinery and auxiliary equipment (machine tools,
wearing looms, paper machines, compressors etc).
 the sum insured should be the new replacement cost of the insured
machinery(value of the item plus customs duties, transportation and
installation charges) the insured is indemnified in respect of total cost of
repairs, in the event of damage which can be repaired. In the event of an
insured item being totally destroyed, the indemnity is based on the
market value of the item on the date of loss, the value of any scrap or
remains being deducted from the sum payable to the insured.
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 4.4 Non-Life Insurance Policies
3. Burglary and House breaking Insurance
 Theft/burglary is another risk to which property, especially easily
portable and valuable stocks, is exposed. The subject
matter insured can be any of the following.
◦ Stock and materials insured can be property held by the
insured in trust or on commission and all other contents with
in the insured premises such as machinery, fixtures, fittings,
furniture, etc.
 This policy pays compensation for

◦ losses /damage to the insured property while with in the

premises by theft or any attempt threat but only accompanied
by actual forcible and violent breaking into or out of a
building; and
◦ Any damage to the premises falling to be borne by the insured
caused by theft or attempts threat.
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 4.4 Non-Life Insurance Policies
4. Motor Vehicle Insurance
 Motor insurance is the most familiar of all types of insurance. For instance purposes, motor
vehicles are classified as follows.
1. Private vehicles used for taxi, domestic pleasure professional and business car of the
insured. these re cars not used for carrying passengers for hire or reward.
2. Commercial vehicles – these are vehicles used for carrying goods or passengers.
3. Agricultural vehicles
4. Motor cycles, motor trade, vehicle of special construction
 The scope of cover for private and commercial vehicles depends on the wish of the
insured. It can take any one of the following;
 A, third party only; which covers only the insured s liability in respect of death or bodily
injury caused to third parties or damage caused to third party property though the use of the
insured vehicle.
 B, third part, fire and theft; this policy covers third party liability as above plus damage to
the insured vehicle caused by fire or loss of the vehicle.
 C, comprehensive ; this is the widest form of cover that and covers destruction of or
damage to the insured vehicles caused by other accidental caused such as collusion or
overturning and malicious acts in addition to third party and fire and theft loss discussed
above.
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4.4 Non-Life Insurance Policies
5. Marine Cargo Insurance
 The marine cargo policy covers all types of goods transported by sea, air
or island waterways including land transit by or rail incidents. It can also
cover sending by ordinary or registered mail, airmail, airmail and parcel
post. The cover in this policy is normally for agreed value.
6. Money Insurance
 One of the pecuniary insurance is money insurance, which compensate
the insured for loss of money sustained as the result of fortuitous
circumstances including though the unlawful acts of other persons such as
burglars and thieves. Money is to mean cash, bank notes, currency notes,
cheques, post orders, money orders, postage stamps, revenue stamps
belonging to the insured or for which the insured is responsible.
 The policy cover applies to money in transit between the insured s
premises and the bank or post office, or any agreed points, and money in
the insured s premises at the same time as in a locked safe or strong room.

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4.4 Non-Life Insurance Policies
7. Fidelity Guarantee
 This policy provides compensation to an insured for loss suffered due to the
fraud or dishonesty of his/her employees. This help the employer to protect
from this risk of his staff especially that main duty involves the handling of
money or securities.
8. Workmen s compensation Insurance
 The Ethiopian labor low proclamation no. 42/1993 holds an employer liable
for death, bodily injury or illness befalling employees from circumstances
connected with their work or at the place of work. This policy protects the
insured, employer, from any loss he might have to suffer as a result of his
having to meet such liability.
9. Public Liability Insurance
 This insurance policy covers the insured against damage for which he may be
held legally liable to a member of the general public.
10. Plat Glass
 This is a risks policy, which indemnifies the insured for the breakage or
destruction of plate glass by any accident or misfortune or fortuitous character.

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4.4 Non-Life Insurance Policies
11. Bonds
 There are bid, performance, supply and maintenance bonds. There the insurer
assumes the position of a surely guaranteeing the faithful performance by a
contractor of his obligation to an employer.
12. Personal Accident
 This policy compensates the insured person in accordance with a scale of benefits
specified in the policy for bodily injury caused by accidental means.
Compensations are benefits that are paid for death, permanent disability, temporary
partial disability, and medical expense.
13. Marine Hull and Aviation
 These types of insurance are limited to the two national carrier’s i.e., Ethiopian
airlines, and the Ethiopian shipping line.
In general, these are the main non- life insurance policies available to customer in
Ethiopia .each policy has their own conditions and terms that should be fulfill by
the contracting parties; exceptions or exclusions and limits, which can be specified
in the policy document. There fore, any one who wants to have an insurance policy
should have knowledge of the terms, conditions and exclusions of each policy
before signing the contact.

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4.4 Non-Life Insurance Policies

Health Insurance
 Health insurance is an insurance against loss by sickness
or accidental bodily injury. The risk may be loss of income
due to disability or medical expenses. The common health
insurance policies are disability income insurance and
medical expense insurance. The costs are;
◦ Hospital Expense
◦ Surgical Expense

Prepared By: YT 63
4.5 Summary
 Life insurance is most commonly used form of insurance whose
purpose is financial protection of the dependents(families) of the
insured and savings for an old age, to cover personal loan and tuition
for education expense, life insurance insures special type of risk whose
occurrence is certain i.e., death. The death claim is decided in advance
and premium is charged based on age, health condition, or occupation
of the person whose life is insured.
 According to the duration, life insurance policies may be classified as;
whole life, term and endowment contracts. Whole life insurance policy
provides permanent protection at a minimum premium payment and it
also has a savings element. Term insurance is issued to provide only
temporary protection to the beneficiaries of the insured. It has no any
savings element. If the period elapsed, the policy will expire and
nothings will be paid to the insured. It provides maximum protection
with a minimum cost. Endowment policy is a modified form while life
policy and provides policy holders both protection and cash if the
person services the endowment period or terminates the policy anytime.

Prepared By: YT 64