INSURANCE & I: “It is better to have it and not need it than, to need it and not have it”

“It is better to have it and not need it than, to need it and not have it”

Risk is typically defined as a chance of loss; loss in this context can be of property (its destruction or damage) that is owned or where one can be held responsible for damage to other people’s property. It can therefore be said that any event that entails a possible outcome of a loss is, risky.

There are different types of risks but we would start our discussion with 2 major ones, especially to streamline it to what concerns Insurance. These are Pure Risks & Speculative Risks.

Pure Risks are risks that entail only a chance of loss, an example is theft of one’s vehicle whilst, speculative risk, like the name implies, has both a chance of loss and a chance of gain (profit), an example is a day’s game at the Casino where you stand to either lose your stake or make a ‘fortune’.

Insurance does not concern itself with speculative risk. Think about it, as a gambler, you place a large bet on a horse in a race and the horse does not win, meaning you lose your ante. Because you know there is a chance of a loss, you ask to insure the outcome such that if the horse wins, you win but, if the horse loses, you can call on your insurer to pay. This is not an insurable risk.

Insurance is only interested in providing coverage for pure risk.

Insurance, in the minds of many, is a myth. Such people cannot conceive the concept of a promise to be paid so much in the event of an accident, in exchange for so little that they would be required to pay the insurer. Doubtful minds perceive Insurance as fraudulent.

The concept of Insurance dates back to early civilization of humans. People would usually come together, by contributing, to help others who suffer losses. This happened amongst many professionals – crop farmers, fishermen et al.

A few centuries ago, some shipping magnates would suffer losses when mishaps of the sea occurred. Since it was uncertain if these mishaps would occur and even more unpredictable who amongst these magnates would be victims of the accidents, the idea of every one of them pooling funds together to assist those that suffered loses, emanated.

There is also the tale of the king Hammurabi’s code in the ancient Babylonian era, where if one a debtor pays a token and as a result of either ill health, disability, or death, he is unable to pay back his debt, the debt would be forgiven.

People treat risks they face in different ways. The 3 major ways that risk is treated are: Avoidance, Retention, and Transfer.

We would sometimes avoid risks. Some school of thought defer from this, they state that ‘Higher risks begets higher returns’, they also recommend that you do not shut your eyes to avoid seeing bad things as, good things would pass you by.

With retention, we do not do anything about the risk, and when accidents happen, we would look for ways to pay for the losses/damages suffered.

Transferring risk is when one pays a stipend to someone else who would assume their risk. In this case, if you suffer a loss which you have transferred, the ‘someone else’ would pay for the loss. This is the role insurance plays.

Insurance is a risk transfer mechanism where one party, called the insured, pays an amount of money, (premium) to another party, called the insurer who promises to place the insured in the same financial position he was prior to a loss which they have covered.

Insurance has evolved over the years as such, there is insurance coverage for the various types of insurable risks.

There are two main categories of insurance that is sold by Insurers in Canada namely

· General Insurance – this comprises Personal Lines, Commercial Lines and, Special Risks

· Life Insurance – consists of specific policies covering Life, Health, and Accident and Sickness

Like the Law and Accounting where you would always find a law and accounts for every and any circumstance, situation, or event, there are also different insurance coverages/types available, a few of which are listed below:

1) Automobile Insurance - this provides cover for third party liability and bodily injury benefits to insureds, as stipulated by law, as well as damage and/loss to the insured automobile as provided and defined under the policy

2) Fire Insurance – provides cover for losses resulting from fire, lightning, and limited explosion

3) Liability Insurance – provides cover for one’s personal liability as well as liability resulting from various activities that cut across any situation where one might be held legally responsible for injury or damage to other people’s property.

4) Habitational Insurance – provides cover for property and liability of homes (and contents) that are owned or rented

Insurance policies are sold and distributed through Insurance Agents and Brokers, and in many instances directly by insurance companies.

It is always advisable that you speak with an expert for all your insurance needs.

In subsequent editions, we would be discussing the different types of insurance policies, breaking them down to your understanding to enable you make informed decisions.