By Chandra Schaffter
Unforeseen losses or tragedies are things that can rarely be avoided and for many years the world had no means of mitigating the effect of such losses. It was only during the past 300 years or so that insurance was thought of as an easy and simple way of ensuring that the effect of a loss is greatly reduced even though the subject matter of the loss can never be restored.
Imagine that you are the owner of a factory worth Rs. 10 million and somebody tells you that if you are willing to pay Rs. 10,000 each year, they would build you a new factory if the existing one was destroyed – would you not jump at that offer? You have the guarantee and are able to sleep peacefully in the knowledge that a fire can never destroy your factory and render you penniless.
Take your own life and those of your dependants; you could protect your dependants and insulate them from the tragedy that would result if you were taken away. By paying as little as Rs. 2,000 a year which is less than Rs. 200 monthly, you could guarantee that your family would receive Rs. 1 million in the event of your death (provided you are 25 or 30 years old at the time of taking out the policy). This is what insurance costs. But the public generally feels the money spent on insurance premia could be put to better use. However when tragedy strikes, only regret follows.
Insurance is an intangible product. It cannot be touched, tasted or felt. But the enormous benefit it brings to society at an affordable cost is immeasurable. Insurance is a rudimentary form of protection which existed even in the times of the Phoenicians who were great traders. The need for insurance was felt in order to encourage trading hundreds of years ago.
The Phoenicians transacted insurance to encourage traders to venture out on the high seas to distant lands carrying goods for sale and bringing back other goods. If the vessel was lost at sea, both the owners of the goods as well as the vessel were compensated by means of a contribution made by those whose voyages were successful.
Where personal insurance is concerned, changing lifestyles have brought about a greater need for insurance. For instance, in the West, children no longer take care of their aging parents nor have they done so for many years. This means that parents have to save for their retirement. In the East, it used to be the custom that children took care of their parents who had looked after them when they were young. A man’s wife usually stayed at home, ran the house and looked after his parents. This custom is also fast dying because often the wife is also employed outside the home. Young couples often feel that they have their own careers to advance and taking care of aging parents is a burden. Thus the need for every individual to have insurance and a pension is becoming increasingly important in Sri Lanka.
The need for insurance increased with the advent of the industrial revolution where people were working more in factories and other industries and giving up their traditional farms and regular means of livelihood. In those days if a factory worker died, his family was left destitute and they usually ended up in the ‘poor house’. Both widow and children went into virtual slavery. No father wanted to leave behind this legacy and insurance therefore began in the form of mutual societies, where a group of persons contributed to a common pool out of which death claims were paid. However the system did not survive for long as the pool was soon exhausted and survivors were not able to realize claims when their turn came.
Life insurance as we know it began with mutual societies, where groups of people in common professions paid a regular sum of money into a common fund for meeting claims following the unforeseen deaths of their members. As the fund grew and its membership increased, the fund was able to withstand occasional losses and also build up its resources. In this way, mutual insurance companies began to be formed. It was only much later that shareholders joined together to establish insurance companies.
The Tooley Street fire in London was another eye opener. Until then fire insurance had not been considered necessary but when the Tooley Street fire resulted in tremendous losses in the city of London it created the need for fire insurance.
It will be seen that all these ventures were targeted towards one objective which was to meet unforeseen losses or the damage from unforeseen events. Insurance therefore even in its rudimentary form provided the means for commerce to progress, and for families to ensure that they were not left destitute following the death of the bread winner.
Insofar as insurance as an industry is concerned, no theory or principle is written in stone except for perhaps the basic tenets such as:
Uberimma fide is the duty cast on the applicant and the insurer to observe utmost good faith in all their dealings.
Indemnification stipulates that you cannot benefit from your loss and you are only entitled to be placed in the same position after the loss as you were before the loss. Subrogation is where you transfer your rights after your claim has been met to enable the insurer to sue the wrong doer in your name.
Contribution is when each insurer pays only his proportionate share in the event you have insured with more than one insurer.
Insurable Interest stipulates that in order to insure a person or property you must stand in a relationship to such that you will benefit from its safety or be prejudiced by its loss.
Let us now take some of the main classes of insurance with which the public are familiar and see how each of them helps society not only to exist but to progress in the present day.
There are many ways in which insurance benefits society:
1. Mortgage insurance
For example a man takes a loan on his house, which he mortgages to the bank. If he dies before the repayment of the loan, the bank would then seize the house and sell it. Insurance however steps in and provides a policy called Decreasing Term Policy whereby should the borrower die at any time, the insurance company pays off the outstanding loan and the house reverts to the heirs without any encumbrance.
2. Personal loans
Banks cover personal loans and all other types of lending by taking out short term insurance for the duration of borrowing.
3. Micro insurance
This is an excellent example of insurance helping the poorer sections of society to borrow without fear of being unable to repay in the event of death. Micro finance organizations give out small loans to large numbers of people and simultaneously take out insurances on the lives of the borrowers so that the loan is repaid in the event of the death of a borrower.
4. Marine insurance
A businessman is able to import goods without fear of losses arising from the perils of the sea because of marine insurance. When a company wishes to import goods they open a letter of credit through the bank in the name of the exporter and his bank. The exporter places the goods on the vessel and obtains a bill of lading, goes to his bank, presents the documents and withdraws the money which is due to him on the strength of the letter of credit. In this way, payment is made immediately the goods are placed on the vessel even before they are received by the buyer. Now what happens if the ship meets with a calamity and the goods are lost at sea? When the letter of credit is opened, the buyer and his bank would have obtained insurance for the value of these goods from the time they are placed on board the vessel, in order to ensure there is adequate compensation in the event of a calamity during the sea voyage. In the absence of insurance both the importer and his bank would face losses and it is only through the intervention of marine cover that it is possible to conduct trade without any loss or hindrance.
5. Hull insurance
Ships which ply the seas are covered under marine hull insurance policies. This cover provides owners of these vessels the security to conduct their business with the knowledge that if their vessels are lost at sea, they would be fully compensated.
6. Fire insurance
This is another important means of protection provided not only to householders but to businessmen as well. Insofar as the householder is concerned, his home is probably all that he has and in developed countries it is purchased with a loan from a bank or lending society. In the event a house is destroyed as a result of a fire or natural perils such as storms, tempests, earth quakes, typhoons, hurricanes, tidal waves and tsunamis, etc., the owner is left homeless and the lending agency has lost its money. Once again, with the intervention of insurance the home owner/lending agency will be reimbursed the amount insured and the lending agency will take its money, giving the balance to the home owner who can then take a fresh loan for a new house because he has honored his debt. If there were no insurance, both the lender and the borrower would have suffered a serious loss. This principle is also extended to businesses, from small factories to oil rigs. All of them can venture into trade without fear, only because they know that they have a ‘fall back’ position in their insurance policy which will come to their aid should the need ever arise.
7. Consequential loss
When a fire or similar peril occurs not only is the property lost but also the profit or rental which would have been earned from the damaged building. The consequential loss policy provides cover not only in respect of the profit that would have been earned but also in respect of all standing charges which will continue even though the business does not function until it is revived.
8. Motor insurance
Third party motor insurance was made compulsory throughout most countries in order to protect other users of the road from death or bodily injury caused by a motor vehicle in motion. It is only because of motor insurance that one is able to drive a motor car freely on the streets, with the full knowledge that in the event of an accident the repair costs would be reimbursed by the insurer. In Sri Lanka motor insurance forms almost 60% of the premia earned in the insurance business. Unfortunately in developed countries such as the US and the UK, enormous damages are claimed sometimes out of proportion to the loss and in many ways claims under motor insurance for bodily injury have become a big business.
9. Cash in transit insurance
A business house moves cash between various locations and also from the bank to its offices and vice versa. The threat of robbery always accompanies these transfers and cash in transit or money in transit insurance cover protects businesses against such losses, thereby enabling them to move their cash around without fear.
All of us face losses through burglary, whether we are house holders or business people. The losses can be big or small but burglary presents an ever-present danger. Some countries are more prone to losses in this way than others and even in a particular country or city certain areas are more likely to be burgled.
11. Professional indemnity
This cover protects professionals such as doctors, lawyers, architects, engineers and accountants, etc., from legal liability claims made by their clients for negligence or error. The claims can run into large sums and prudent professionals therefore take out adequate protection, which includes their legal expenses. In some countries, certain classes of professionals such as doctors, accountants and lawyers are compelled by law to take out professional indemnity covers.
12. Directors’ and officers’ liability
The new Company’s Act imposes heavy penalties on directors and senior officers of companies in the event of being found guilty of negligence in their duties. Independent directors on the boards of companies are reluctant to take up office unless the company provides them with some form of protection and companies would not be able to attract directors of quality unless they provide this insurance cover.
13. Personal accident insurance
We are all prone to meet with accidents and the consequences could be disastrous to our lives and livelihoods. Personal accident insurance provides cover for death by accident and this is extended to cover loss of limbs, eyes, etc. Weekly benefits are possible during the period of disability to cover loss of income particularly of self-employed persons.
14. Sickness insurance
The cost of medical care in private hospitals is astronomical. Unfortunately most people in Sri Lanka wait until they are old and reaching retirement age to think of sickness insurance. Sickness insurance must be taken at a young age to provide adequate protection for the family should the need for expensive medical treatment arise.
15. Critical illness
Critical illness insurance in Sri Lanka is comparatively new and provides substantial benefits in the event of the contraction of specified critical illnesses such as cancer, nephritis, paralysis, etc.
Although initially insurance was started to support sea trade and subsequently to protect families, it has now diversified so much that it is unrecognizable. Insurance has kept innovating different types of polices to meet the changing needs of society and this has kept this industry alive. From the rudimentary insurance practices by the Phoenicians to modern day insurance for rockets and space craft, it has come a long way but still maintains the basic principle of providing protection for a very large sum of money through the payment of a very small premium. Insurance is a prime need in today’s society and the price of imprudence can be very high.