How Insurance Works?
Insurance starts with the proposal and ends with the benefits.
Example1. It starts with identifying what is very valuable to Wale( an insured) and making plans to transfer all the risks (fire, burglary, liability, etc.) associated with him no longer being in possession of that valuable item to another person (an insurer).
It ends with the benefits which is the compensation (cash, repairs, etc.) that Wale gets from the insurer when those risks eventually happen.
Example 2: Insurer – Eze Insurance Company
Insured – Wale Lasisi
Wale pays N2, 000.00 (premium) to Eze Insurance Company for an Insurance cover for the theft of his truck. Should the truck being stolen, Eze Insurance Company compensates Wale as agreed in the contract.
It is worthy of note that the items (phones, laptops, I pads, cars, houses, etc.) which Wale cannot do without is what Insurance refers to as the Subject Matter of Insurance.
The subject matter of Insurance is the item you must have an insurable interest in.
Risk Transference
This is the major aim of Insurance, the transfer of risks
. This means transferring
the financial burden which the customer would suffer from whenever the risks eventually happen.
The major parties involved are the
(1) Insured
(2) Agents
(3) Insurer
– Registered Insurance brokers belong to their association (The Nigerian Corporation of Registered Insurance Brokers-NCRIB)
-Registered Insurance agents belong to their association (The Association of Registered Insurance Agents of Nigeria-ARIAN)
The Insurer is the Insurance Company that receives the premium and pays compensation to the insured after the agreed unfortunate event has occurred.
The Insurance Company is registered by the law to undertake the business of insurance. It can be; -A Life Company
-A General Business Company
– A Composite Company
A Life Company underwrites and covers Life and Investment policies.
An Insurance company is Composite if it underwrites and covers general
businesses (e.g., fire, burglary, public liability, motor, etc.)
A composite Insurance company combines both life and general businesses.
The Law of Large Numbers
This is known as the pooling of risks
Insurance involves the pooling of funds from many (people) out of which the unfortunate few are compensated.
Many
are all the policyholders contributing the same risks while the unfortunate few are the few out of all the lotto whom the proposed risk happened to.
For example, 20 people insure their cars. Even though the cars have different values as well as different premiums, they have successfully created a car insurance pool
. The very few cars that will be involved in accidents will be repaired or replaced by the owners out of the pool created.
The premium charged on each risk insured is always a fraction of the whole value of the subject matter. It would never have been practicable to charge N200,000 for a car of N4,000,000 and still expect compensation or any form of profit; the only way around it is the pooling of such identifiable and similar risks.
To compensate the unfortunate and still create a profit margin for the insurers is to pay compensation from the amount drawn from the pool created. This is more logical because it is not possible for all 20 cars to be involved in an accident.
Other pools could be created vis a vis the Fire Insurance Pool, Life Assurance Pool,
Aviation Insurance Pool and so on.
How Insurance Affects Our Daily Lives
Insurance is a profession that all other professions rely on; it affects all aspects of human endeavor.
Family
The lives of our family members are important to us; Insurance cares by compensating whenever there is something wrong with our family members in the future.
For example: when a family member is involved in an accident, the medical bills can be taken care of or a bulk amount given out as compensation for incapacitation. Ultimately, a death benefit could become payable. In any of these cases, it is all in a bid to reduce the hardship to which the affected family member would be opened.
Business
People invest their money in establishing factories, producing goods, transporting these goods, and other associated business risks; insurance encourages people to do business without fear of the risks associated with their businesses.
Examples:
An importer will need a Marine Insurance policy for goods passing through the waterways or by air.
A trader will need a Goods-in-Transit policy for the goods being transported from place to place.
The contractor needs to ensure risks associated with contract works plus injury to the laborers.
. Workers need insurance; investment for the future when they are no longer in service.
Individuals generally need to contribute for one need or another to assist the family when the needs eventually arise.
Employment
Insurance Companies create employment opportunities in all their outlets spread all over. Some as marketers, some as Underwriters, others as Dispatch Riders, Drivers, IT Specialists, Public Relations Officers, and so on.
Also, they go-ahead to carry burdens of other employers to ensure they continue to be in business.
Agriculture
Insurance, as it concerns agriculture, ensures that farmers are adequately compensated after suffering losses as a result of disasters. It replaces the emergency assistance the government provides during the period of agricultural disasters.
In Nigeria today, the Nigeria Agricultural Insurance Corporation (NAIC) is the major Insurer of agricultural produce.
Farmlands, poultries, farmhouses and farming tools, and other farming equipment are insurable.
Economy
When businesses flourish, the business environment booms, the economy grows. A healthy economy helps in creating more opportunities.
Businessmen carry out their dealings because they have secured their profits.
The same goes for market men and women who ensure their wares whilst transporting them and; a secure economy is to the advantage of both the illiterates and literates.
Government
Insurance companies pay taxes. This increases government revenue and capacity to provide more for the people.
Government agencies also secure their assets and investments by taking up the appropriate insurance covers for them.
Society
Insurance companies pay taxes. This increases government revenue. The revenue collected is plowed back into society; the fund is used to build roads, schools, hospitals and provide other basic amenities.
Insurance covers exist whilst the roads are being constructed and all the acquired amenities are equally insured.
