The insurance industry has played a vital role in the management of risks across varying sectors of the global economy. It has provided guarantees to the direst of situations, enabling complex national and multinational transactions, creating employment and supporting businesses to focus on their core functions whilst transferring all insurable risks to the insurance company.
Insurance has for decades served as oil that lubricates economic units and their allies. Despite the significant roles being played by insurance, the public trust and expectations of the insurance industry has always been short of the standard. Questions could be asked that, are members of society making insurance-based decisions under duress of the law or there is a personal interest in the essence of insurance and how it functions in the risk management sphere.
Could it also be that the population is not interested in the services provided by the insurance industry due to experiences from insurers in the past? What consumer centred perceptions are aiding in the mistrust in the insurance market and how have these perceptions shaped the industry behaviour in times past? How will they shape the industry today and where does the future of insurance business transaction lie going forward? This article seeks to explore why the insurance industry seems to be earning a name as the publicly misunderstood industry in a financial market where many believe transparency is key to driving growth in the market.
The intertwined nature of insurance
The nature of insurance and its global networks makes it possible to eliminate the geographical boundaries associated with a risk in a specified location. A risk situated in Accra, Ghana may be partly insured in Munich, Germany, somewhere in London, United Kingdom, Lagos, Nigeria or any fit reinsurer or insurer as deemed fit by the primary insurer and now with regulation, approval given by the regulator. A typical case was the consequence of the September 11 terrorist attacks in the United States which led to global reforms to the policy wording on the terrorism clause in most insurance policies. This not only led to changes in policy wording but also a surge in reinsurance pricing globally.
The event in the US saw many global insurers withdraw terrorism cover on policies which previously offered the cover at no extra cost. In some countries where majority of the local insurers decline to write businesses which when occurring are deemed to be catastrophic and its associated liabilities beyond the strength of an insurance industry such as flood, terrorism and the like, the government is usually compelled to provide an incentive to the insurers by establishing a state sponsored reinsurance pool to provide the strength the insurers may need to ensure the risks and this echoes the lubricating effect of insurance.
The public expectation vrs the reality
Everyone has an expectation of life. We expect life to span out in a manner we have planned or produce results in a manner we have invested. This is same for the insurance contract we purchase and the interactions engaged before the contract is enforced. One could say that, in our part of the world that is the West African Region, people who purchase insurance products have always purchased the products based on the trust they have developed for the persona with whom they are transacting the insurance business.
If we trust the person selling the insurance, then we are certain all our needs pertaining to the insurance product will be satisfied. Thus, the conversations and interactions held before the product is purchased has a more than proportionate effect on our expectation of the product purchased. This is where expectations are formed and the very instance where these expectations are likely not to be met. In a sale driven market, expectations are shaped in the customer to earn the trust in order to win the business.
This is partly fuelled by the customer who finds it difficult parting with the premium for the purposes of insurance. We are eager to hear something that may convince us to purchase the insurance policy vis `a vis the role of insurance in mitigating the risk one may be exposed. The average consumer of an insurance product may attest to the fact that, they have been disappointed a time or twice and possibly had a feud with their account relationship manager over what they thought they had protection for versus how the protection works. Insurance is a contract with obligations to both parties.
Every insurance contract is subject to its conditions, warranties and exclusion. They are the rules of the insurance game although in soft cycles, some insurers may grant ex-gratia to their insured for losses which may otherwise not been admissible under a policy. The reality lies within the contract and not the sales manager or the persona with whom you may have a cordial relationship. Hence it is imperative to ensure that, what is expected is what you have in the contract of indemnification you have purchased. This in contract law is referred to as “consensus ad idem” where we are saying, there needs to be the meeting of the mind with regards to the item under consideration by all parties involved.
Premium to values at risk ratio
The law of large numbers is the strength of the insurance industry. As risk professionals, we believe if we should gather enough people with varying risk exposure and contributing to the pool appropriately based on their exposure, the probability of the entire sample experiencing a loss runs towards zero. With this in mind, the insurer is expected to charge just a percentage which is usually a little fraction of the entire portfolio of risk presented to the pool.
The insurance company is in business
The insurance company exists to manage a pool of risks in return for an equitable premium. Operational expenses such as, the expenses of the employees engaged in the business to provide their expertise, mobility tools, software costs and the like incurred in the effective management of the pool are borne by the participants of the pool. Also, the existence of the entity was facilitated by funds provided by investors called shareholders in the business. These shareholders expect to make a return on their investments made to the entity in the form of dividends.
These dividends amongst other sources of buffering it are also made possible by the prudent management of the pool to make profits. Generally, when an insured fails to make claim in a given insurance year, the general notion is that, the insurer then must have made profits off its back. Contrary to that, the failure of a member of the pool to claim from the pool in a year does not guarantee that the other members of the pool also did not make a claim from the pool. Given that the premium paid is a fraction of the actual risk presented, a scenario where all members of the pool make a total loss claim against the insurer, what are the chances the insurance business will be of interest to any party to invest.
The total failure to attract investor interest in the industry leaves everyone as a self-insured person. Anyone can imagine the impact of such a situation on the local economy and global sphere at large. Hence it is of importance to establish the fact that, the insurance business owes the insured a duty to indemnify when legitimate losses are presented and the duty of the insured to understand that, the insurance company is more or less like a referee in a game where players of similar nature are required to contribute for their well-being. In return, the referee is compensated for all the expertise and risk taken.
ABOUT THE WRITER
The writer is an Associate Member of the Chartered Insurance Institute, United Kingdom, a Chartered Insurer and holds a Master of Business Administration in Finance, Bachelor’s Degree in Economics from the University of Ghana, Legon
Email: [email protected]
Mobile No: +233(0)261776904