By HANNAH ATOMODE
COMPONENTS OF RISK
1. Uncertainty: Doubt about the future, lack of complete knowledge. This is the main component of risk, because if we are fully aware of what is going to happen, then there is no element of risk involved. If you know your car will have an accident or that your home will be on fire, then no risk is involved. For life insurance, we know we will all die one day, but the uncertainty relates to the timing of our death.
2. Level of risk: This explains the likelihood of something happening and how serious it will be if it does happen. The frequency and the severity. Risks with high frequency always come with low severity, while low-frequency risks always have high severity. This concept is very important to an insurer in determining premium and acceptable criteria.
3. Peril and Hazard: Peril is defined as what gives rise to a loss, while hazard is what influences the operation of the peril. An example of a peril is lightning; an example of a hazard is reckless driving. Hazard can either be a moral hazard or physical hazard.
Why Do You Need Insurance?
A lot of people feel they don’t need insurance, as they see payment of premium as giving free money to insurance companies. It is also a thing of concern, especially at the point of renewal of an insurance policy, when no claim arises from the previous period of insurance. The valid reason why you need insurance is to have peace of mind. The essence of insurance is to act as a risk transfer mechanism, which implies that the risk is transferred from the insured to the insurer. Insurance does not prevent risk from occurring, but it provides a form of financial security and peace of mind to the insured. When losses happen, the small premium paid by the insured is used to purchase the cost of repairs or the cost of replacement of the damaged subject matter of insurance.
Insurance also involves pooling of risks. Losses of a few people are met by the contributions of many who are exposed to similar potential losses. Insurance benefits from the law of large numbers; when there are many people with insurance policies paying premiums, it makes it easy for the insurance company to pay claims.
Benefits of Insurance:
1. Peace of mind to the insured.
2. It releases capital for businesses to rebuild when losses occur.
3. Employees are kept in work if there are major losses that could have led to shutting down the business.
4. Insurance helps to minimize losses.
Risk Sharing
An insurance company is expected to manage the risks they accept. They determine the limits of acceptance for a particular category of risk; when the limit is exceeded, they have the option to either go for co-insurance or reinsurance. Co-insurance is when risks are shared amongst insurance companies; the proportion of acceptance determines the premium received and losses that will be paid if the risk crystallises. Reinsurance is when the insurance company transfers part of their risk to a reinsurance company when their limits are exceeded. They may decide to transfer all the risk by way of fronting to a reinsurance company.
Classes of Insurance:
1. Property Insurance
2. Pecuniary insurance
3. Motor Insurance
4. Liability Insurance
5. Marine and Aviation Insurance
6. Combined policies
7. Health Insurance.
•Hannah Atomode (ACIIN, YIPP) is a business Analyst and insurance underwriter .
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