Most people believe insurance is a means of milking people, conveniently overlooking the peace of mind it brings when they receive a payout in times of distress. In the past and still today, car owners purchased motor insurance only because it was mandatory and to avoid harassment by the police. Although it is the most popular compulsory insurance, motor insurance is just one of several compulsory insurance on the market. In this article, I shall guide you through the benefits of mandatory insurance.
Let’s start with the basics. Insurance is a financial arrangement that protects one against potential financial losses or risks. It is a crucial safety net for managing risks and safeguarding individuals, businesses, and communities against unforeseen events. It is an agreement between an individual or entity (the policyholder) and an insurance company (the insurer). In exchange for regular payments known as premiums, the insurer agrees to provide indemnity or compensation in the event of specified risks or events outlined in the insurance policy. The fundamental concept of insurance is to spread the financial impact of unexpected events across a larger group of people, reducing the burden on any individual.
With the basics covered. Let’s talk about compulsory insurance. Many insurances are optional and depend on individual preferences and needs. Whether insurance should be voluntary or mandatory is a complex question. When voluntary, insurance serves as a means of self-preservation. However, it can also serve as a social protection mechanism. Ultimately, balancing individual liberties with societal needs and considerations is the priority.
However, governments may make some insurance mandatory for various reasons. This begs the question: why? Here, we delve into the reasons for the mandate of specific insurance types as we explore their benefit to society.
Why Mandatory Insurances?
The concept of mandatory insurance arises from the government’s duty to safeguard its citizens’ welfare. For example, compulsory motor insurance ensures that victims of accidents caused by negligent drivers receive compensation for bodily injury/death and property damage. With insurance, victims of road insurance can be adequately compensated can adequately compensate road accident victims. Mandatory motor insurance, therefore, safeguards both the victims and society from bearing the entire burden of someone else’s mistake.
Governments will make specific insurance compulsory because:
- It ensures financial protection.
Certain life events, accidents, or liabilities can lead to significant financial burdens. Individuals will need to be pre-equipped with resources to handle such incidents. By mandating insurance, governments ensure that people have a safety net to cover expenses that may arise from unexpected situations that impact themselves and society.
- It mitigates economic impact.
Large-scale disasters, such as natural catastrophes or public health crises, can have profound economic consequences. Governments may mandate insurance coverage to mitigate the economic impact of such events. For instance, earthquake insurance in earthquake-prone areas helps distribute the financial burden of reconstruction and recovery more evenly, lessening the strain on government resources and individuals/businesses who will be affected.
- It encourages responsible behaviour.
Mandatory insurance can also promote responsible behaviour and discourage negligence. For instance, compulsory health insurance encourages individuals to seek medical care when needed, reducing the strain on emergency services and preventing potentially severe health issues from worsening due to delayed treatment.
- It strengthens risk pools.
Mandatory insurance creates larger risk pools, leading to more stable premiums and better risk distribution. When a more significant portion of the population participates in insurance programs, the insurance company spreads out the overall risk, making it possible to offer coverage to high-risk individuals without excessively high premiums. This inclusivity ensures that insurance remains accessible to everyone, regardless of their risk profile.
- It ensures compliance with legal and financial obligations.
Specific mandatory insurance requirements exist to protect third parties and fulfil legal obligations. For example, professional liability insurance ensures that professionals provide compensation if their actions result in financial losses for their clients. This coverage maintains the integrity of professional services and offers clients recourse in case of negligence.
In conclusion, mandatory insurance goes beyond personal choice. It’s a mechanism to build resilient societies, ensure social welfare, and foster a sense of shared responsibility. By requiring coverage for specific risks, governments and organisations create safety nets that promote the well-being of all members, maintain economic stability, and preserve the overall fabric of a compassionate and supportive community.
