The principle of contribution is a core
concept in insurance, particularly when the insured has multiple policies
covering the same risk. According to this principle, if a policyholder has
multiple insurance policies that apply to the same loss, each insurer is
required to contribute proportionally towards the claim. In the context of
Ghana, the contribution principle plays a significant role in ensuring fair
distribution of liability among insurers, protecting against over-insurance,
and managing the risk of policyholders profiting from multiple claims on the
same loss.
This set of notes will explore the
definition of contribution, its purpose and application, the importance of
contribution for the Ghanaian insurance industry, the calculation process,
challenges in implementation, and the regulatory framework governing the
principle.
1. Definition
of the Principle of Contribution
Explanation: Contribution is an insurance
principle stating that when multiple policies cover the same asset or
risk, each insurer shares the responsibility for compensating the
policyholder based on their proportional coverage.
Key Terms:
Multiple Insurance Policies: When an
insured item or risk has more than one policy covering it.
Proportional Sharing: Each
insurer is responsible for a share of the claim, calculated according to
the amount of coverage provided by their policy.
Example: If an individual insures their
house with two insurance companies for the same risk, each insurer must
contribute proportionally towards any claims made, based on the level of
coverage provided by each.
2. Purpose
of the Principle of Contribution
Equitable Claim Settlement:
Contribution ensures that each insurer bears a fair portion of the claim
based on the risk they underwrite, preventing any single insurer from
bearing the entire cost.
Prevention of Over-Insurance and Profit: By
applying contribution, insurers prevent policyholders from profiting from
multiple claims on the same loss. It avoids situations where the insured
would receive more compensation than the actual loss amount.
Protection for Insurers:
Contribution helps distribute liability among insurers, safeguarding each
company’s financial stability by preventing excessive claims from
single-policyholders with overlapping policies.
Promoting Transparent Insurance Practices: The
principle promotes transparency and fairness, as it requires all parties
to understand their obligations when multiple policies cover the same
risk.
3. Application
of the Principle of Contribution in Ghana
Home and Property Insurance: In Ghana,
it is common for high-value properties, especially commercial buildings,
to be insured by multiple insurers. If a loss occurs, each insurer
contributes to the claim according to their coverage proportion.
Motor Vehicle Insurance: If a
vehicle is insured under multiple policies (e.g., for third-party, fire,
and theft across different companies), each insurer will contribute based
on the policy terms.
Health and Life Insurance: While less
common in health and life insurance, the contribution principle may apply
if a policyholder has multiple accident policies that overlap, ensuring
proportional responsibility among insurers.
Marine and Cargo Insurance: In Ghana’s
import-export sector, goods in transit may have multiple insurance
policies, especially if they are valuable or high-risk. In case of loss or
damage, insurers share the claim burden proportionally.
4. Importance
of the Contribution Principle for Ghana’s Insurance Industry
Fair Distribution of Claim Costs:
Contribution helps balance financial responsibility among insurers in
Ghana, supporting fairness and reducing the likelihood of disputes between
companies.
Reduction of Moral Hazard: The
principle discourages policyholders from taking out excessive insurance
coverage, which could lead to profit-seeking claims, thereby reducing
fraud risks and enhancing industry trust.
Enhanced Industry Collaboration:
Contribution fosters collaboration among insurers who may need to work
together to process and share claim costs fairly.
Market Stability and Premium Control: By
avoiding over-compensation, insurers can control premium costs more
effectively, which helps stabilize the insurance market and makes
insurance more affordable for Ghanaians.
5. Calculation
of Contribution in Insurance
Proportionate Contribution Method: In this
common approach, each insurer’s liability is calculated based on the
proportion of the total sum insured by each policy. The formula is:
Contribution by Insurer=(Sum Insured by InsurerTotal Sum Insured by All Policies)×Loss Amount\text{Contribution
by Insurer} = \left( \frac{\text{Sum Insured by Insurer}}{\text{Total Sum
Insured by All Policies}} \right) \times \text{Loss Amount}Contribution by Insurer=(Total Sum Insured by All PoliciesSum Insured by Insurer)×Loss Amount
Example Calculation: Suppose a
property is insured for a total of GHS 200,000 across two insurers:
Insurer A with GHS 120,000 and Insurer B with GHS 80,000. If a claim for
GHS 50,000 arises, each insurer’s contribution is calculated as follows:
6. Challenges
in Implementing the Contribution Principle in Ghana
Lack of Awareness: Some policyholders in Ghana may be
unaware of how contribution works, leading to misunderstandings or
disputes if multiple insurers are involved in claims.
Complexity in Claims Processing:
Calculating contributions can be complex, especially if the policies have
differing terms, coverage levels, or deductibles. This complexity can
cause delays in processing claims.
Insurance Policy Terms: Policies
in Ghana may vary significantly, which can lead to disagreements between
insurers regarding responsibility and liability for a claim.
Limited Regulatory Guidance: Ghana’s
insurance regulatory framework may not cover specific scenarios involving
contribution, leading to challenges in applying the principle effectively
and fairly.
7. Types
of Insurance Where Contribution Is Commonly Applied in Ghana
Fire and Property Insurance: Large
properties, such as commercial buildings, are often covered by multiple
policies due to high-value risks, and the contribution principle is
frequently applied in these cases.
Marine Cargo Insurance: Imported
goods may have multiple policies from local and international insurers,
making contribution relevant when calculating claim payments.
Liability Insurance: Businesses
may have multiple liability policies to cover the same risks (e.g., public
liability, employer’s liability). Contribution ensures each policy
contributes proportionally.
Auto Insurance: In rare cases where multiple
policies cover the same vehicle risk, contribution calculations are used
to manage claims.
8. Role of
Insurers and Brokers in Ensuring Effective Contribution Practices
Policy Transparency: Insurers
must clearly outline contribution-related terms in their policies to
ensure clients understand how claims will be handled if multiple policies
exist.
Claims Assessment Teams: Ghanaian
insurers often rely on specialized teams to assess claims involving
multiple policies, ensuring accurate and fair calculation of
contributions.
Collaboration with Brokers: Insurance
brokers play a significant role in Ghana by advising clients on
appropriate policy levels and minimizing the potential for over-insurance
or multiple coverage overlaps.
Client Education: Insurers and brokers can help
clients understand the importance of disclosing all existing policies to
avoid disputes and ensure smooth claims processing.
9. Regulatory
Framework for Contribution in Ghana
National Insurance Commission (NIC): The NIC
provides oversight to ensure fair application of the contribution
principle among insurers, monitoring compliance to protect policyholders.
Insurance Act of Ghana: The Act
requires transparent disclosure of terms, ensuring policyholders are aware
of the impact of multiple policies on claim settlement.
Consumer Protection Laws: These
regulations protect policyholders by requiring insurers to handle
contribution claims fairly and provide clear explanations about how
multiple policies affect compensation.
10. Case
Studies of Contribution in Ghana
Property Insurance Case: A
commercial building in Accra insured with two policies suffered significant
fire damage. Each insurer, having proportional coverage, contributed
towards the claim to cover the loss, illustrating contribution’s role in
managing high-value claims.
Cargo Insurance Case: A
logistics company shipping goods insured with two policies experienced
loss in transit. The contribution principle was applied to recover costs
from both policies based on their coverage proportions.
Liability Insurance Case: A business
with multiple liability policies covering a workplace injury utilized contribution
to manage the claim process. Each insurer contributed proportionally,
reducing the financial impact on a single insurer and providing timely
compensation to the injured party.
Conclusion
The principle of contribution is
essential to maintaining fairness and transparency in Ghana’s insurance
industry. It ensures that claim liabilities are distributed among multiple
insurers when multiple policies cover the same risk, thereby protecting insurers
from excessive losses and preventing policyholders from benefiting unfairly
from overlapping policies.
Despite challenges such as complex claim
calculations and potential disputes, the contribution principle promotes
responsible insurance practices. Ghana’s regulatory framework, including the
National Insurance Commission, continues to support the principle by enforcing
transparency and fairness requirements. By fostering fair competition and
protecting both insurers and policyholders, contribution remains an integral
part of Ghana’s insurance landscape, reinforcing the industry’s stability and
integrity.
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