This short post takes you through what insurance is all about. Read on!
To understand the term insurance, we need to look at what risk is. Generally, in whatever we do in this world, we will almost always get involved in unfortunate situations. Usually, these unfortunate situations are unforeseen at a point in time. Take for instance, you eating a large bowl of rice. Right before you start to eat the rice, you may not foresee you may actually get chocked. This unforeseen event is known as accident. It is an uncertain event that may cause a loss to occur. Or let’s consider walking to school. It is never foreseen that you may actually slip and fall to the ground or even get involved in a motor accident. This unforeseen, fortuitous event that may occur is the “product” of risk. So then what is risk?
A risk is simply what may cause an accident. Well that is a simple definition to the lay man. Take a good look at this picture, what do you see? Well your guess is as good as mine. Although she may very much land safely, there exist a possibility of her actually not landing safely! It’s a risk! Again, a risk in itself may be referred to us A SITUATION THAT MAY INVOLVE OR CAUSE AN EXPOSURE TO DANGER OR LOSS. Basically, IT IS THE POSSIBILITY THAT A LOSS MAY OCCUR.
In view of the above, one may come to understand that, everything we do has a possibility that something bad may occur. Think of any. For instance, I may fall from climbing a wall and may be injured. You may listen to music at high volume and damage your ear drum. So you see, unless perhaps you’re living in Heaven (no kidding!), you are likely to get involved in a situation that involves exposure to danger.
A number of types of risks have been identified. This include financial risks, operational risks, fundamental risks, pure risks, systematic risks, particular risks among others. (I will publish a post to explain these terms later on). Basically, since everything we do involves risks, many scholars, officials and business managers have sat down to device means of reducing or even curtailing the effects so that, we are always living well and in good/positive conditions. One device that have evolved over the years is INSURANCE.
Insurance is a transfer mechanism in the contracts of risks. It is the pooling of fortuitous losses by the transfer of such risks to insurers, who agree to indemnify insured’s for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk. The above definition is what most lecturers use in defining what insurance is. In short, this definition explains insurance as a mechanism where if you are involved in an unfortunate event that causes a loss or damage or injury, another party (insurance company) may bring you back to your previous/proximate financial position before the occurrence of the loss based on the terms and conditions in the contract. The above definition provides that insurance is a pool. The pool is a term which implies that, the losses incurred by the few are spread for the entire group so that, as a result, average loss is substituted for actual loss. Investopedia defines insurance as a “Risk-transfer mechanism that ensures full or partial financial compensation for the loss or damage caused by event(s) beyond the control of the insured party”
Therefore, take insurance as a means where you transfer all or part of your risks to another party known as the insurance company or insurer of which you undertake to pay premiums according to the terms of the policy so that, if you get involved in a loss the insurance company will bring you back to your previous financial position. It can also be said to be a promise of compensation for a specific loss in exchange for periodic payments.
In short, insurance is a risk transfer in that, you are promised by an insurance company that, you will not bear all or any of the losses! And all you will have to do is pay your periodic amount and follow the policy’s terms and conditions!
My next post will look into WHY YOU NEED INSURANCE. Stay safe!