Over the years, there have been so many arguments about what insurance business really is.
How did the Insurance Business start?
First, it will make sense to try to lay a foundation about how insurance came to be.
Hopefully, I can either reinforce what you know about insurance or clear your doubts.
It may not be as robust as expected because It will be handled in another post.
To start with, humans are not perfect.
This means we are prone to mistakes. Mistakes that happen at different times in our journey in life.
Some of these mistakes are avoidable while some are not dependent on you at all.
However, these errors have some form of impact on your lifestyle when they happen.
Interestingly, man is a thinking being. Humans have brains that encourage the ability to ponder over issues in order to assess how it comes to be.
This high level of thinking is what differentiates us from animals. It is what helps us continually improve our imperfections and attempt to limit the effects of our mistakes caused by our imperfections.
Stay with me…through thinking and observation, we have got educated in the workings of life to an extent. We have documented our findings into the various body of knowledge we have now.
One such learning is the concept of risk and how it affects our lives.
Insurance and risk management was built on this concept of risk.
What is Risk?
There are several definitions of risk, however, I will choose the most relevant to our discussion.
“Risk is the likelihood that the hazard will indeed cause the peril to operate and cause the loss” – Dickson and Stein (1999)
Hold on…I will explain…
A Peril means the cause of a loss e.g theft, fire, personal injury, etc.
Hazard means the factor which influences the activation of the peril that will lead to a loss e.g Flood is a peril while closeness to a river is the hazard.
Hope you are with me so far…so risk is the possibility of a loss occurring from several natural and unnatural influences around us in our everyday life.
You must, therefore, note that our mistakes either directly or indirectly may have a financial impact on us especially when losses occur due to agents like fire, flood, theft, and accident, etc.
Most times, we never see it coming but they happen…
For man, it was not enough to think up a problem but to further think up a solution that will also become a body of knowledge.
This gave birth to Risk Management and Insurance; two powerful concepts that have created robust industries to better the lives of mankind…
What is Risk Management?
“Risk Management means the identification, analysis, and economic control of those risks which can threaten the assets or earning capacity of an enterprise” – (College of Insurance and Financial Management; CIIN).
So risk must be identified, measured and controlled economically.
Insurance, therefore, can be considered as a method of risk management. It is a method of transferring risk from a person (the insured) to an entity (the insurer) who guarantees financial compensation for any loss suffered.
This risk is borne by accepting a financial token called premium.
Please note that a financial pool from the premium paid and a pool of similar risk is formed to manage and execute compensation as the situation calls for it.
For example, a pool of money(premium) for motor risk, etc.
In Conclusion on Insurance Business
This is how insurance came into existence.
From deliberate human thinking, documentation, and action.
Over time, this concept grew to become viable insurance businesses helping both individuals and businesses to maintain financial stability and thrive economically.
Risk is something to be prepared for by risk management.
Yes, there are people who commit malpractice and do not hold up their end of the agreement for various reasons.
However, would you say the whole industry has no value?
Would you say a sample space of one or two cases out of a hundred is enough to pass judgment?
So my friend, is insurance a scam?
Do you have any questions or contributions about this post?
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Thanks for reading!