INTRODUCTION TO INSURANCE

INTRODUCTION

This unit will teach the definition of risk, the classification of risk, the definition of insurance, and the market insurance intermediaries. It is important that you grasp this concept before proceeding to the next unit.

 What is Risk?

Risk can simply be defined as the unlooked for, unwanted event in the future. Risk is the sugar and salt of life. Risk brings sweetness and bitterness to life. Life is full of risk and any individual, organization or state can be a victim any day. In everyday life, risk comprises the steady toll of fire, accident, theft, explosion and other similar events. The list is lengthy and costly in terms of money and in terms of human pain and suffering.

Classification of Risk

There are several different ways of looking at risk, but we adopt the classifications based on the nature of risk and its insurability.

Pure Risks – These are risks that can result only in loss, such as a plane crash, physical loss or damage to goods by fire or theft or the incurring of legal liability to pay damages by negligently causing bodily injury to someone or damage to the property of others. Pure risks are insurable because they are capable of statistical measurement.

Speculative Risks – Speculative risks may result in either a profit or a loss, which may be either large or small. Examples of speculative risks are: change in fashion, market change, etc. These risks are uninsurable because there is no way of measuring their effect.

Political Risks – These risks are outbreak of wars, trade/currency restrictions, etc.

Life without Risk

Human beings cannot exist without risk. This is applicable to business since, for example, manufacturing activity cannot be stopped just because people will be injured nor can we ban motor vehicles on the road in order to stop accidents. Do we stop the use of electricity or cooking gadgets just because of fire outbreak? Clearly, these options are unreasonable. The world has to continue even in the face of risk and insurance is one of the many methods of doing this.

Therefore, various classes of insurance policies exist to take care of the various risks to which organizations, human beings and governments are subjected to in everyday life.

What is Insurance?

As a house owner or factory owner, are you ever bothered by the possibility that your house or factory and all your possessions might be burnt to ashes one night or that your car might be damaged beyond repair by another car on the road? Or are you worried that you might inadvertently hurt someone when you are driving to work or just by crossing the road carelessly? Buying insurance is one way by which you can remove some of your worries and gain peace of mind.

Insurance can therefore be defined as an arrangement by which one party (the insurer) promises to pay another party ( the insured) a sum of money if something should happen which causes the insured to suffer financial loss. By so doing, the responsibility for paying for such losses is then transferred from the insured to the insurer. In return for accepting the burden of paying for losses when they occur, the insurer charges the insured a price called premium.

The Insurance Market

The major players in the insurance market are:

1. Insurance companies 
2. Reinsurance companies 
3. Insurance intermediaries 

Buyers of insurance products.

Insurance Companies – Insurance companies are risk takers. They accept risks transferred to them by individuals, corporate bodies, government and their agencies/corporations etc. Insurance companies are required to be registered by the National Insurance Commission. The requirements for registration are contained in the Insurance Act 2003. Re–Insurance Companies – As individuals purchase insurance from insurance companies, insurance companies also purchase insurance from Re–insurance companies. Companies that accept insurance from insurance companies are called re–insurance companies. Re–insurance is therefore a form of insurance whereby an insurance company can transfer to another insurer all or part of its liabilities in respect of claims arising under the contracts of insurance that it writes.

 Insurance Intermediaries

Like any commodity or service, insurance transaction involves intermediaries through which insurance services pass to the insuring public.
There are two main categories of insurance intermediaries. They are insurance brokers and insurance agents.

Insurance Brokers are required to be registered and professionally qualified. The requirements for registration as a broker are contained in the Insurance Act 2003.A broker is an intermediary between the insurer and the insured. The main function of a broker is to act as the agent of the insured (the person taking an insurance policy) in obtaining insurance cover for his risk and as agent of the insurer (insurance company ) in collecting premium.

Insurance brokers receive brokerage (commission) from the insurance companies with whom they place business.

Insurance Agents – An agent is a person who acts on behalf of another. Insurance agents act as agents of insurance companies in obtaining businesses from potential policy holders.

The main duty of an agent is to solicit risk and collect premium on behalf of the principal (insurer). An agent receives commission and other remuneration from insurers.

Insurance agents are required to be licensed by the National Insurance Commission. The minimum requirements for licensing insurance agents are contained in the Insurance Act 2003.

There are three classes of insurance agents:

The Full–Time Agent: A full–time agent acts for only one or more insurance companies. Also, the agent might be an independent agent or an employee of an insurance company. The full–time agent devotes all his time towards the selling of insurance products. He is remunerated--- in the case of an employee, by monthly allowance plus commission and in the case of an independent agent by commission only on the business produced.

The Part-Time Agent: A part–time agent does other things apart from selling insurance products. He might act for one or more insurance companies. A part–time agent earns commission only on business introduced.

The Staff Agent: The staff agent is an employee of an insurance company. He sells insurance products on behalf of only his employer. In return, he earns a commission on businesses introduced in addition to his monthly salary.

Buyers of Insurance Products

Buyers of insurance products are:

Individuals – The demand for insurance by individuals depends on their financial position. As a person’s income rises, he can afford to buy the financial security provided by insurance. A rise in a person’s income enables the person to acquire more property such as; a car, a house and household goods, which will in turn create the need for insurance protection.

Business Organizations–The demand for insurance by business buyers is a function of economic development. As an economy grows, more capital - intensive methods of production tend to be employed. This will in turn increase the demand for property insurance for the protection of property and liability insurance to compensate employees, consumers and third parties for injury or damage to property resulting from the activities of business organizations.

Charities, Clubs and other Organizations--This third group of insurance buyers tends to demand for insurance when their activities and income increases. An increase in activities increases the needs for group personal accident for the protection of their members and property insurance for the protection of their assets.

Governments and Government Agencies/Corporations Governments, Federal, State and Local councils are big time buyers of insurance products. The need for insurance by these buyers is mainly to protect governments’ assets movable or immovable. In the case of agencies /corporations, the need for insurance protection is obvious due to the fact that some of their activities are hazardous. For instance, can NNPC do without insuring its assets? Can airlines afford not to insure their aircraft? The answer is definitely “no” as no aircraft can be allowed to fly in the air space of another country without insurance protection.

 CONCLUSION

We have examined the meaning of risk, classifications of risk and how to manage our exposure to risk. Also, we went further to define insurance and we looked at the insurance market as well as buyers of insurance products.

SUMMARY

As human beings, we cannot totally avoid or eliminate risk completely from our lives. The world has to continue even in the face of mounting risks of fire outbreak and various forms of accidents. However, we can manage our exposure to risk and insurance is one of the many methods of doing this.

Risk is the unlooked for, unwanted event in the future.
Risk can be classified based on the nature of its insurability as follows:

Pure risks, which are risks that can result only in loss. They are insurable because they are capable of statistical measurement. Speculative risks may result in either a profit or a loss, for example,

change in fashion and market fluctuation. They are uninsurable, while political risks are outbreak of war, trade/currency restriction etc.

Insurance is an arrangement by which one party promises to pay another party a sum of money if some thing should happen which causes the insured party to suffer financial loss. The insurance market comprises insurance companies, reinsurance companies, insurance brokers and insurance agents.

Buyers of insurance products include individuals, business organizations, charities/clubs and governments, government agencies/corporations.