Ever bothered about what the future holds for you? Ever been wondering, “what do I do to keep my brand new car safe? Especially, given the high crime waves across? Or ever wondered “How do I ensure my child’s education continues even after I’ve passed on? “. Well, yes! Everyone by now should have asked him or herself, one or two of these aforementioned questions at some point in time in their lives before.
Life is filled with a lot of uncertainties. However, insurance is one of many such “interventions” put in place to mitigate the effects of some of such unforeseen events that may suffice.
What then is Insurance? -“Insurance is often called a Risk Transfer Mechanism”[Malta International Training Centre- Module 1,2014]. Bingo! That’s simple to digest right? This implies that insurance is all about transferring the risks you’re exposed to, to another able “person” to take care of those risks (i.e. the uncertainties of life).
Okay, so where did this whole “Insurance” concept come about? Well, relax and let’s delve into that:
The need for the product Insurance, emerged from the fact that entrepreneurs wished to take risks. In the early days, these risks were encountered when sea-men sent their sailing ships off on hazardous sea journeys to trade with far countries. The entrepreneurs were nervous of the fact that a failure of one venture could cause losses that would devastate them financially. The need for insurance further evolved when these entrepreneurs needed to obtain financing for their ventures. The financiers had an even smaller appetite to take on the risk of some,” one large failure” fully on their own account, and they demanded some protection against a loss.
The principle of the day- the higher the risk, the higher the cost of investment capital– still remains a business ethos to this day and methods evolved that began to share the cost of any individual failure, larger than any one entrepreneur could realistically bear. The method of spreading losses across many traders by way of mutual funds – and then insurance contracts – emerged as an instrument whereby the cost of failure could be reduced to a pre-agreed reasonably fixed and manageable cost.
The roots of the insurance business therefore lie in spreading financial losses across many people so that the impact on one is bearable. It is in effect, a money brokering business and it receives an amount of money that the insurance company (or risk underwriter) considers to represent monetarily, the risk that the insurance activity will bring to the overall fund and when. The insurer will then accept the call back from their own capital, from one insured, when a loss has occurred that falls within the pre-determined definitions of thee policy contract (NB: This is very key determinant in matters of compensation in the event of any loss suffered by the insured). Generally speaking, the payment will be measured to precisely reimburse or indemnify, the policyholder for the losses that were incurred in the risk incident.
To be continued in the next part of our series…
Malta International Training Centre – Module 1,2014
By: Winna Amenyedor (Motivational Pen)
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