The description above epitomises insurance. A quick distinction between the two is literally important. In gambling, there is always a winner and a loser, but insurance may place both participating parties in the winning frenzy. You don’t lose anything in insurance; you rather gain emotionally or financially. Besides, gambling poses social iniquities whereas insurance strengthens socio-economic development. Socio-economic developments can never have a risk-free environment.
Risk is thus inevitable in our daily routines. It takes a different form and nature in all spheres of our lives. There are two main techniques for handling potential risk exposures: physical control and risk financing. Under the financing techniques, the possible options include retention, non-insurance transfers and insurance. Retention means that the firm or individual retains part or all the losses that can result from a given loss. Once the decision to retain is taken, the firm may keep a funded reserve – the setting aside of liquid funds to pay losses. A credit line can also be established with a bank to borrow funds to pay losses as they occur. This can further be described as self-insurance which is also popularly termed as captive insurance in the corporate perspective.
Non-Insurance Transfers are other risk-financing techniques. They are methods other than insurance by which a pure risk and its potential financial consequences are transferred to another party. Examples include contracts, leases, and hold-harmless agreements. For instance, a firm may insert a hold-harmless clause in a contract by which one party assumes legal liability on behalf of another party. This is an attempt to shift a potential loss to someone who is in a better position to exercise loss control or possibly might have insurance in place.
In the two above-mentioned techniques, the concept of insurance still comes into play as a last resort. The question, then is, does insurance have any good substitute?
Insurance began centuries ago notably by the European merchants who introduced a loss sharing mechanism among themselves. They pool resources and pay out losses to members during business trips, especially in marine adventures. Other parts of the world like Ghana were also practising risk-sharing systems which were akin to insurance. For instance, in pre-urbanisation, industrialisation and migration, the extended family system in Ghana was equally functioning as insurance. With time, mathematicians, statisticians, social scientists, lawyers, actuaries, etc. develop models and assumptions based on observations, experiences, and balance of probability into the concept of insurance.
Since its birth, the concept has evolved, and several substitutes have been developed to perform the same roles. It is, however, debatable to proclaim that all the substitutes to insurance have been able to function as expected. In one way or the other, each of those substitutes picks a characteristic of insurance. The substitution effect is perhaps seen in the various types of firms, associations or persons that perform insurance roles in the risk management process. Such types of firms include stock insurers (like Hollard Insurance), mutual insurers, reciprocal exchanges, LIoyd’s of London, health maintenance organisations, etc. operating as risk financing bodies but on the concept of insurance.
It is therefore uncontestable to say that insurance has no good substitute. Aside from many of the reasons given above, there is absolutely no justification to want to secure your future through other means than insuring with Hollard Insurance Ghana. Insuring with Hollard is a calculated risk management technique everyone or organisation should emulate.
References:
Rejda, G. E. & McNamara, M. J. Principles of Risk Management and Insurance.
Risk Management Study Manual, ACCE, Hollard Insurance Ghana.
The Risk Management Study Manual by ACCE is only accessible to registered members.
About the writer
Ali Mohammed Sulley is a Branch Manager at Hollard Insurance, Tamale
