Insurance

Insurance is a financial arrangement where individuals or entities pay a premium to an insurance company in exchange for protection or coverage against potential losses or risks.

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Insurance is a financial arrangement where individuals or entities pay a premium to an insurance company in exchange for protection or coverage against potential losses or risks. In the event of an unfortunate incident, the insurance company provides compensation or financial support according to the terms of the policy.

It is a protective measure against potential risks faced by individuals or objects. It operates as a pool of risks. Many individuals contribute money to create a common fund, collectively sharing the risk of potential losses. This pool is utilized to indemnify any contributor who experiences a covered loss.

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Insurable vs. Non-Insurable Risks

Insurable risks are those for which statistics can be gathered and calculated to assess probabilities. On the contrary, non-insurable risks lack statistical data for estimation and calculation.

Insurance vs. Assurance

Insurance deals with risks that may or may not occur, focusing on probabilities. Conversely, assurance pertains to risks or events that are certain to happen, essentially based on possibilities.

Types of Insurance

  1. Motor Vehicle Insurance: This is a legally required insurance that covers damages to or caused by vehicles. There are three types of motor vehicle insurance. They are third-party only, third-party fire and theft, and comprehensive motor vehicle insurance. Third-party only protects third parties against damages or injuries caused by the insured vehicle. Third-party fire and theft covers fire damage and theft of the insured vehicle in addition to third-party protection. In the case of comprehensive, it offers extensive coverage, including damage by accident, fire, theft, and third-party protection. Unlike the other two, it also protects the owner of the vehicle.
  2. Burglary, Theft, and Robbery Insurance covers losses resulting from breaking and entering, theft, larceny, etc.
  3. Consequential Loss Insurance covers loss of revenue or profit due to business interruption caused by events like fire.
  4. Accident Insurance covers various accidents such as personal accidents, sickness, employer’s liability, and industrial accidents.
  5. Bad Debts Insurance covers irrecoverable debts.
  6. Life Assurance protects individuals against future events like maturity of the policy or death.
  7. Endowment Assurance is the payment at the death of the assured, before a defined period, or at the period’s expiration.
  8. Fidelity Guarantee Insurance protects firms against potential losses due to embezzlement or fraudulent acts by employees in positions of trust.
  9. Marine Insurance covers ships and cargo against losses during sea transport.
  10. Whole Life Assurance is the payment upon the death of the assured.
  11. Annuity Assurance is the payment upon the assured’s retirement.
  12. Term Assurance covers death during a specified period.
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Insurance Policy
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While we have listed various forms of insurance in the foregoing, there are however some kinds of risks that are non-insurable, which is where we are going next.

Non-Insurable Risks

  1. Gambling: It involves chance with no reliable statistics for premium calculation or loss estimation.
  2. Speculation: It is high-risk probability without statistical calculation. This makes it ineligible for insurance coverage.
  3. Loss of Profit through Changes in Fashion: Unpredictable changes in fashion trends cannot be insured due to their erratic nature.
  4. Loss of Profit through Maladministration: Intellectual mistakes or mismanagement by individuals cannot be covered by insurance.
  5. Loss of Profit through Competition: Insuring this risk could lead to reckless and uncontrollable competition among entrepreneurs aiming for substantial profits.
  6. Loss of Profit through Fall in Demand: This lacks reliable statistical data for insurance calculation due to its unpredictability.
  7. Loss of Profit through War and Riots: War and Riots are unmeasurable risks that cannot be quantified for insurance purposes.
Boardroom Meeting. Photo by Benjamin Child on Unsplash

Basic Principles of Insurance

  1. Utmost Good Faith (Uberrimae Fidei): This principle mandates all parties involved in an insurance contract to fully disclose relevant information that might influence the contract’s terms.
  2. Insurable Interest: This stipulates that a person must insure an object in which they have a vested interest, recognizing potential personal loss in case of damage or loss.
  3. Indemnity: Indemnity involves the insurance company aiding in restoring the insured individual to their pre-loss position after the insured event occurs.
  4. Proximate Cause: For the insurer to indemnify the insured, it’s crucial that the immediate or proximate cause of the insured event aligns with the risks covered by the insurance.
  5. Subrogation: It grants the insurer the right to take over the insured’s rights after compensating them for a suffered loss.
  6. Abandonment: This states that if the cost of repairing a damaged insured object surpasses its actual value, abandonment of the object is the appropriate course of action.
  7. Contribution: This prevents the insured from profiting from insurance, emphasizing the contractual nature of insurance based on good faith.
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Benefits of Insurance

  1. Risk Reduction: Insurance mitigates risks by providing financial protection against unforeseen events, minimizing the impact of potential losses.
  2. Road Safety: Motor vehicle insurance promotes cautious driving behaviour among drivers. It fosters road safety awareness to avoid accidents.
  3. Savings through Endowment Life Assurance: Endowment life assurance serves as a dual-purpose scheme, combining life coverage with a savings element, aiding individuals in building financial reserves for the future.
  4. Facilitation of International Trade: Marine insurance facilitates secure international trade by safeguarding ships and cargoes, ensuring continuity despite potential risks during transport.
  5. Integral to Local Trade: Insurance plays a pivotal role in local trade as it offers protection against various risks that businesses might encounter in their operations.
  6. Protection in Old Age: Life assurance acts as a protective measure during old age. It provides financial security and stability for individuals.
  7. Motivation for Workers: Life assurance incentivizes workers to work diligently, knowing that they have secured financial coverage for their loved ones.
  8. Provision for Dependents: Life assurance serves as a provision for dependents. It ensures they are financially supported in case of the insured’s demise.
  9. Investment with Profit Yields: It serves as an investment avenue that can yield profits. It provides opportunities for financial growth.
  10. Loan Accessibility: Holding an insurance certificate enables individuals to secure loans, leveraging their policy as collateral for financial assistance.
  11. Role in Financial Markets: Insurance companies play significant roles in both money and capital markets. They contribute to the financial ecosystem’s stability and growth.
  12. Employment Opportunities: The insurance industry generates employment opportunities with the presence of diverse roles across various sectors within the insurance domain.
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