Self-insurance: insureds’ foe & insurers’ biggest competitor

Insurance promise to pay

Insurance is simply a promise to pay. It could also be viewed as a risk transfer mechanism where individuals and households transfer risks or unpleasant situations to a professional risk carrier for a fee or premium to cater to those losses as and when they occur. It is for this fact and role that this time-tested mechanism has proved very useful.

Insurance globally numbering about 13,000 insurers have fulfilled this mandate albeit some few challenges. Individuals, households, and enterprises have indeed protected their valuables, assets, earnings, and liabilities properly under insurance contractual provisions. Insurers both life and non-life have carried out this sacred mandate of claim payment with oversight and supervision by continuous, graduating, and stringent regulation in their respective jurisdictions. It is worth noting these insurance companies also insure themselves. Most insurance companies insure their accumulated risks with more than one re-insurer. Insurers sometimes even co-insure their risk with other insurers. At other times, part of the risk is borne by policyholders through other provisions; the application of excess, deductible, or waiting periods, exclusions, conditions & warranties. Excesses or deductibles are minor amounts imposed by insurers on policyholders to mitigate against attritional or small claims. These provisions are also intended to provide the policyholder with the financial incentive in the management of their assets and to curb certain moral hazards. Moral hazards are situations of sheer negligence. Moral hazards are situations where there is a likelihood of the policyholder having paid an average premium bringing a higher-than-average likelihood of loss to the pool from the onset.

Insurance is one of the unique financial assets for everyone in the 21st century. Unfortunately, when an individual or entity does not insure, he or she becomes his or her insurer. In Ghana, with insurance penetration hovering around 2% and insurance coverage around 30% it’s fair to conclude that most Ghanaians self-insure.

Self-insurance refers to a financial strategy where an individual, business, or organization takes on the responsibility of covering potential risks and losses themselves, rather than purchasing insurance from a third-party provider (such as an insurance company). In essence, it involves setting aside funds to cover potential losses or damages that may occur in the future; instead of paying premiums to an insurance company. Self-insurance is typically an option for enterprises that have the financial means to absorb potential losses without causing significant financial strain. Organizations or individuals who have the financial capability to handle certain types of risks on their own typically consider self-insurance. This approach can sometimes provide some flexibility and control, and potential cost savings since it eliminates the profit margin and administrative expenses of insurance companies. They can also provide some cash flow options and possible risk customization for the policyholder. Self-insurance might in the interim provide some pseudo advantages. For an individual to effectively manage his key risks, it becomes onerous for them to make key provisions that insurance will readily provide free or as part of their bouquet of services delivery.

Largely, individuals and enterprises might lay their claim to self-insurance on the following grounds:

Ignorance of insurance: The sheer fact of not knowing can lead to some individuals and enterprises not taking insurance. Certain aspects of business or life activity are sometimes considered by the public as uninsurable by insurers, which is quite untrue. Insurers exist to insure. Insurance has grown full-cycle to a point where certain unconventional risks like loss of voice, body parts, and public events are readily insured. Everyday risks like business continuity, home protection, education continuity, funeral expense management, etc. are well-catered for by most insurers. That is their mandate and their business.

Lack of Planning: Most enterprises budget for everything but insurance. The idea of some risks materializing seems too remote for them. Excuses, therefore, become the order of the day. They perceive to have the conscious ability and or superiority to take care of situations. Most individuals and enterprises believe largely in their ability to calm the storm when it happens.

Man, without religion, in Ghana, is nothing – that might be a good maxim. Most people lurk behind religious dispositions and bring on superstitions and spirituality in risk considerations. They somehow claim zero-loss situations until it happens.  ‘’It will not happen to me syndrome’’ among others plays a role in the extent to which people self-insure. They claim superiority in such matters and believe losses are associated with certain people and businesses.

However, Self-insurance carries the potential downside of exposing the individual or enterprise to significant financial losses if the insured events occur and are costly to address.

Risks of self-insurance:

Financial exposure: Self-insuring means bearing the full financial burden of losses, which can be significant in the case of a major event. These major events ranging from risks with low frequency to high frequency can affect the bottom line of the enterprise. Incidences like the death of the breadwinner or the business keyman, fire to a building, injury to workmen, legal suits, etc. could have dire consequences.

Unpredictable losses & contingency: Large or unexpected losses could strain the financial stability of the individual or organization. The timing of losses is highly uncertain. Losses can indeed materialize on the first day of the period under consideration rendering futile the whole activity. Losses could also emanate at such a time that the enterprise is at its lowest financial ebb.

Compulsory Insurance & Regulatory Requirements: Some jurisdictions have regulations and financial requirements for entities that choose to self-insure. There are barriers to having certain financial structures especially when certain losses might affect public discourse or when compensation is strict following injury or damage to others. In Ghana, motor insurance (third party) is compulsory. No amount of self-funding or self-insurance will counter this statutory provision unless under certain limited, defined conditions.

Limited expertise: Insurance companies have expertise in assessing and managing risks, which individuals or organizations may lack. Most insurance companies employ the services of highly qualified insurance professionals, risk managers, accountants, surveyors, actuaries, lawyers, etc. to eventually help run the business of insurance. All these professionals work in the interest of all stakeholders.

Loss of Ancillary support: Insurance companies provide certain services en masse to the insuring public without any surcharge. A case in point will be the defense cost that is usually provided when one has a legal liability policy with an insurance company.

Lack of discipline in savings: Many individuals and enterprises provide only lip service to themselves and overestimate their ability to stick to their decided financial course of action. They renege at some later point missing prior objectives. Their dependents or other victims of their acts usually suffer the consequences when the unexpected happens.

Generally, Self-insurance poses a huge risk to the financial ecosystem. It becomes a strain on productivity and the whole value system of the economy suffers.

Even though some rural and urban folks have gotten on the insurance train through mobile technology, a lot can be achieved collectively when we all join the regulated ‘pool system’. When we all get on board, insurers can charge lower premiums based on the large numbers. Losses and claims can be modeled. Financial innovations are pioneered and the whole society benefits as a result.

In conclusion, there are about 50 insurance companies in Ghana; about 30 are non-life insurers with the remaining 20 doing life business. The competition that exists among us is keen and rife. Businesses tend largely to recycle from one insurer to another. Insurers offer juicy deals, discounts, and attractive packages to attract and win the custom of policyholders and even holding brokers.

Statistically, the real competitor is self-insurance. They consist of a chunk of the insuring population. Most of the non-insured are out there. Insurers would need to do more to widen their reach, scope, and deploy relevant technology and marketing drives to get all on board. The government could also help operationalize certain compulsory insurances like Marine and Public Liability among others.

For us to get the needed output in risk protection and insurance, we will need the right input.

Self-insurance is indeed a bane to the development of insurance in Ghana and by extension everywhere.


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