From the part one (1) and two (2) of above article on 24th June and 1st July 2019, we established that Insurance planning is a vital part of the financial planning process at all stages of life, and the use of various insurance policies or products is necessary as part of your financial plan in your lifetime. It was made clear in last week’s article that a better understanding and appreciation of insurance planning techniques in your investment drive can help in the protection your assets, your practice, and your family.
We also established that the modern economy uses insurance to protect the economic value of assets, including human assets. Hence, pooling of risk is at the heart of insurance, making it a viable business proposition to the insurance companies of today.
The concluding part of this article will focus on the intangible nature of insurance services; and the fundamental principles of insurance for investors to appreciate the value of insurance in their invest mix.
The Challenge of Intangible Nature of Insurance Products to Insurance Industry Growth
Insurance policy is essentially an intangible product. The insurance customer cannot see or feel the product s/he is buying. Although the policy document does give comfort that coverage is on, generally no real service is delivered until a claim occurs. The mechanism of insurance involves a contractual agreement in which the insurer (i.e. the Insurance Company) agrees to provide financial protection against a specified set of risks for a price called the premium (i.e. annual contribution to an insurance pool) for the insured (i.e. the customer or policyholder)
In normal commercial transactions, the legal maxim ‘Caveat Emptor’ – meaning ‘Let the Buyer Beware’ – operates. This means that a buyer takes the risk regarding quality or condition of property purchased. This, in turn, implies that the buyer has an opportunity to examine the product before purchase. Since the insurance customer cannot see or feel the product s/he is buying, insurance transactions need to be governed by special principles in order to protect the of the contracting parties’ interests – particularly customers or policyholders.
It is in view of this that insurance contracts are government by special, fundamental legal principles. These makes insurance contracts very unique and different from other kinds of commercial contracts.
It is important for readers to understand that insurance business has two main components – namely Life and general insurance; hence, the principles applied may differ slightly regarding application of the principles.
Understanding Fundamental Principles of Insurance for Financial Protection decisions
For insurance products or policies to be the most preferred financial instrument for investors to protect their valuable assets, the following fundamental principles must be understood by investors:
- The Principle of Utmost Good Faith:
The duty of the insured (the customer) and insurer (the insurance company) to disclose all relevant facts. This is relevant to both life and general insurance. For example, information about one’s property or person including one’s health , habit, personal history, family history, etc ., are known to only to the person taking insurance and rarely are public knowledge . Yet, these issues are important for assessing the risk and deciding the rate of premium to be charged. The insurance company can only know most of these facts only if the prospects comes forward to disclose them truthfully.
- The Principle of Insurable Interest:
This refers to the legal right to insure. In other words, it is a must for an insurance contract to have validity. This principle is also relevant to both life and general insurance. Insurable interest is the legal prerequisite for insurance. Therefore, just as the owner of a house or factory has an insurable interest (financial relationship in the asset), the bank that has lent money for construction of the house or the factory also has an insurable interest in these to the extent of the outstanding loan amount – since in the event of damage or destruction of the property, the bank stands to lose a part or whole of the money lent.
Hence, insurable interest exists to the extent the insured stands in such a relationship to the subject matter of insurance (the house or the factory); so that s/he stands to benefit from its existence and suffer loss in case of its damage or destruction.
Referring to life insurance, a person is deemed to have insurable interest on his own life to an unlimited extent, as in the event of his premature death there will be loss of his future earnings for his family. It may be difficult to compute the future earning of individual. However, by application of the Human Life Value (HLV) concept, reasonable estimates can be made. Also, spouses are assumed to have insurable interest in each other’s life. However, in the case of other members of the family, insurable interest is not presumed to exist. A person therefore cannot insure, say, his brother or sister though they may be dependent on him.
- The Principle of Indemnity:
This determines the extent of an insurer’s liability in the case of loss. The need for determining the liability is, however, largely applicable to general insurance alone. In the case of Life Insurance, the economic value of human life cannot be measured precisely before death. It could be unlimited. However, life insurance cannot strictly be a contract of indemnity.
- The Principle of Subrogation:
Another corollary of the indemnity principle – and again exclusively applicable to general insurance – it refers to the rights that an insurer acquires vis-à-vis the insured when the insurer has paid him an indemnity.
- The Principle of Proximate Cause:
This is the rule that determines how to proceed with processing a claim lodged by an insured (the customer), when a loss could apparently be traced to more than one event…some of which are not covered by the insurance contract.
- The principle of Contribution:
This tells us how the liability is to be met when the insured has taken out insurance with more than one insurer. For example, if a person takes out a fire policy on his house for the full value of GH¢10,000 with two insurance companies and claims GH¢10,000 from both insurers, he would be attempting to collect GH¢20,000 – thus making profit. Since the policyholder is required to declare his insurance with both companies under the principle of Utmost Good Faith, the two insurance companies would share the loss in proportion to the sum insured in relation to the total sum insured (GH¢20,000).
It’s the understanding of principles of insurance on the part of the insured that makes insurance policies the most-preferred financial instrument for investors to protect their most valued assets, since they can be wiped out by natural disaster or fire, or stolen by armed robbers. Hence, the only way to bridge the knowledge-gap in insurance is through effective pre-selling of insurance policies and seminars for prospective customers.
There is also need for the regulator to partner with one or two institutions whose core mandate in service provision is financial education, to undertake financial knowledge transfer programmes through Television, Newspapers, Radio and Seminar presentations to drive the insurance industry. Insurance companies should improve their customer services/prompt claim payment and have a strong combination of protection and appreciable investment returns to make insurance products the most preferred financial instruments in our financial planning.
“THE FUNCTION OF INSURANCE IS TO PROTECT THE ECONOMIC VALUE OF ASSETS”
………………………….Comments and contributions are welcome from practitioners to grow Ghana’s insurance industry.
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