CAPUT58

Quite often, we hear people saying that insurance is a gamble. The common assertion is that the insurer is betting that the insured will not die within the insured term, while the insured bet the other way. This could not be further than the truth. In gambling, a risk is created where non existed before. If for instance, you buy a bet from TattsLotto for $100, you have in effect created an unknown risk for yourself of the possibility of losing $100. The risk was not present before the bet was made.

Insurance on the other hand, transfers an existing risk ie the risk of death to the insurer. The risk existed even before the insurance is bought. And through the pooling of similar loss exposures of a large group of contributors, the insurer’s risks are spread, and hence are reduced. Even though losses are inevitable, the pooling ensures that the risks for the insurer are well covered which is reflected in the rate structures.

Loss is the ugly outcome of risk. because of the possibility of loss, it gives a reason why people purchase insurance against risks. But not all risks are insurable. For a risk to be insurable, it must meet certain criteria, which is to ensure that the losses that occur are within the means of the insurer to handle. The concept of “true insurance” versus “specially-arranged insurance” should be differentiated.

You have probably heard of famous hairstylist insuring their hands and well-known movie stars insuring certain parts of the body for a large sum of money. These arrangements are not what we termed as “true insurance” but are “special-arranged insurance” that cover specific risk that are undertaken by large underwriting groups like Lloyds of London. The premiums arrived at are estimates of the potential loss based on special techniques developed for such purposes that are not normally used by insurers to determine their premium rates.

Leave a Reply