H.Insured: Insurance has no substitute: do you agree?

Ali Mohammed SULLEY

Does this sound like gambling to you? Read on. Essentially, insurance is a risk financing mechanism which replaces total loss with average loss.  An individual’s loss becomes an average loss once such loss was transferred to a potentially homogenous pool of losses.  In other words, one exchanges a 100-Dollar loss with a Dollar price. Interesting, right?

The description above epitomizes insurance.  A quick distinction of the two is literally important.  In gambling, there is always a winner and a loser, but insurance may place both participating parties in the winning frenzy. You don’t lose anything in insurance; you rather gain emotionally or financially. Besides, gambling poses social iniquities whereas insurance strengthens socio-economic development.  Socio-economic developments can never have a risk-free environment.

Risk is thus inevitable in our daily routines.  It takes different form and nature in all spheres of our lives.  There are two main techniques in handling potential risk exposures: physical control and risk financing. Under the financing techniques, the possible options include retention, non-insurance transfers and insurance.

Retention means that the firm or individual retains part or all the losses that can result from a given loss.  Once the decision to retain is taken, the firm may keep a funded reserve – the setting aside of liquid funds to pay losses.  A credit line can also be established with a bank to borrow funds to pay losses as they occur.  This can further be described as self-insurance which is also popularly termed as captive insurance in the corporate perspective.

Non-Insurance Transfers are other risk-financing techniques.  They are methods other than insurance by which a pure risk and its potential financial consequences are transferred to another party. Examples include contracts, leases, and hold-harmless agreements.  For instance, a firm may insert a hold-harmless clause in a contract by which one party assumes legal liability on behalf of another party.  This is an attempt to shift a potential loss to someone who is in a better position to exercise loss control or possibly might have insurance in place.

In the above two mentioned techniques, the concept of insurance still come to play as a last resort. The question, then is, does insurance have any good substitute?

Insurance began centuries ago notably by the European merchants who introduced a loss sharing mechanism among themselves.  They pool resources and pay out losses to members during business trips especially in marine adventures.  Other parts of the world like Ghana were also practicing risk sharing systems which were akin to insurance.

For instance, in pre urbanization, industrialization and migration, the extended family system in Ghana was equally functioning as insurance.   With time, mathematicians, statisticians, social scientists, lawyers, actuaries etc. develop models and assumptions based on observations, experiences, and balance of probability into the concept insurance.

Since its birth, the concept has evolved, and several substitutes have been developed to perform the same roles.  It is, however, debatable, to proclaim that all the substitutes to insurance have been able to function as expected.  In one way or the other, each of those substitutes picks a characteristic of insurance.

The substitution effect is perhaps seen in the various types of firms or associations or persons that perform insurance roles in the risk management process.  Such types of firms include stock insurers (like Hollard Insurance), mutual insurers, reciprocal exchanges, LIoyd’s of London, health maintenance organizations etc. operate as risk financing bodies but on the concept of insurance.

It is therefore uncontestable to say that insurance has no good substitute.  Aside many of the reasons shared above, there is absolutely no justification to want to secure your futures through other means than insuring with Hollard Insurance Ghana.  Insuring with Hollard is a calculated risk management technique everyone or organization should emulate. It’s no gamble.

>>>The writer is Hollard Insurance’s Branch Manager at Tamale and can be reached via 0246133147

References: Principles of Risk Management and Insurance; Rejda McNamara, Risk Management Study Manual, ACCE, Hollard Insurance Ghana.

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