THE PRINCIPLES OF INSURANCE

WHAT IS INSURANCE?

Insurance is a device for reducing risk by combining a sufficient number of exposure units to make their individual losses collectively predictable. The predictable loss is then shared proportionately by all units in the combination. Insurance is based on the law of large number. In essence, Insurance allows the individual insured to substitute a small but definite cost (premium) for a large but uncertain loss under an arrangement whereby the fortunate many who escape loss will help compensate the unfortunate few who suffer loss.

Insurance help eliminates anxiety and instill confidence in the insured that he will be restored to a comfortable position in the event of an occurrence of the insured risk. Insurance is a product that one buys when you don’t need it but becomes too late when the need eventually arises.

For a better understanding of the workings of the insurance sector, a synopsis of the principles will be made for the insurance consumers’ to better appreciate their rights and obligations.

RISK MANAGEMENT

Risk is an uncertainty concerning the occurrence of a loss or Risk is the potential that a chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable outcome) Risk Management refers to how we react to risks or challenges we face on daily basis and can be broken into 3 categories depending on our risk appetites:

·       Flee from risk: associated with risk adverse people who try to avoid taking on risk as much as possible e.g. refuse to store petrol in the house for fear of fire outbreak.

·     Face the risk: Take on the risk headlong and damn all consequences e.g. driving your car without a cover

·       Transfer the risk: shifting the risk profile to another believing they have better technical expertise and capacity to bear the risk for a token. This is the role of the Insurance Company, referred to as Underwriters

CATEGORIES OF RISK

—A  Pure risk: there are only the possibilities of loss or no loss. Examples: Damage to property from fire, lightning, flood or earthquake etc

—A  Speculative risk: either profit or loss is possible. Examples: investment in shares or real estate, betting on horse race

ONLY Pure Risks are insured but exceptions always exist. Like some insurers will insure institutional portfolio investments

A—  Fundamental risk: affects the entire economy or large number of persons or groups within the economy – rapid inflation, cyclical unemployment, war, natural disaster, terrorist attack

A— Particular Risk: affects only individuals and not the entire community. For e.g.. Car thefts, bank robberies, dwelling fires

Types of Pure Risk

—  Premature Death

—  Insufficient income during retirement

—  Poor health

—  Unemployment

—  Property risks

—  Liability risks

PERILS AND HAZARD

Peril refers to activities, events or something that can cause a loss. Examples include falling, crashing your car, fire, wind, hail, lightning, water, volcanic eruptions, choking, or falling objects while Hazard is a condition that creates or increases the chance of loss or an inherent physical or chemical-characteristic that has the potential for causing harm to people, property or the environment

THE PRINCIPLES OF INSURANCE

·        Utmost Good Faith (Uberrima fides): This means that all parties to an insurance contract must deal in good faith, making a full declaration of all material facts in the insurance proposal, must deal honestly and not withhold useful information.

·      Insurable Interest: This implies that you must have a legal right to what you are insuring or have interest in it. For example, insuring your car and not that of your father or insuring your life and not that of your child

·    Indemnity: This means that should the insured event occur, the insured should be replenish for the amount of loss or reinstated to the position before the occurrence of the insured event and should not be deprived of any benefits

·     Subrogation: This focuses on preventing the insured from profiting from and covers the right to third parties for damages.

·       Proximate Cause: focus is on immediate cause, nearest or direct cause of the event resulting in the loss. All activities or sequence of events leading to the event is important and guides decisions while making settlements

POLICY DOCUMENT

This is an essential part of the insurance contract as it clearly states the terms and conditions guiding the contract between the insured and the insurer, states the roles and rights/obligations of the parties involved and the cover; the risks that are being insured.

This document has been the source of dispute between the insured and the insurer. Experience has shown that most of the insured do not know their rights and obligations due to the fact that most don’t read the policy document to understand what they are covered for. When a loss eventually occur, claim request is sent believing they are fully protected but end up being disappointed when the claim is rejected.

Study, digest and understand the prints (be it small or large) and seek clarification on any grey area before you append your signature. Once you sign, it becomes a legal document that even the court will rely on in making judgment. IGNORANCE IS NOT AN EXCUSE IN LAW!

For comments, assistance or clarification, send your details to Michael@bizadvisory.tk or info@bizadvisory.tk and I will get in touch with you immediately.