What is Insurance?
Insurance is the process by which a person or organisation agrees, for a fee called a premium, to pay an agreed amount of money for a loss suffered under specific circumstances. The party promising to indemnify is the insurer (called the assurer in life insurance, or the underwriter in marine insurance). The party protected in exchange for a premium is the insured (or assured, for life insurance). A claim is a request made by the insured to the insurer for compensation after a loss.
Insurance is described as the “pooling of risk” because everyone who wants to insure against a common risk contributes a small premium into a shared fund, out of which the few who suffer a loss are compensated.
The Insurance Contract
A contract where one party agrees, in return for a premium, to pay the other a sum of money if a certain event occurs, or to indemnify them for a loss from an insured risk. Reinsurance lets the original insurer share part of a very large risk with another insurer, to reduce their own exposure. Underwriters are members of Lloyd’s who provide cover to ships and cargo. The document setting out the contract’s terms is the policy, and the insured is called the policyholder.
Certificate of Insurance vs Cover Note
| Certificate of Insurance | Cover Note |
|---|---|
| A legal requirement | Not a legal requirement |
| Permanent for the contract period | Temporary |
| Issued only once the full premium is paid | Issued once part of the premium is paid |
Procedure for Obtaining Insurance Cover
- Contact an insurance broker, agent, or company.
- Complete a proposal form honestly and in full.
- Actuaries (insurance statisticians) determine the premium.
- The applicant pays the first premium (monthly, quarterly, or yearly).
- The insurer sends a cover note confirming insurance is in place.
- The full policy is issued within 30 days of the first premium payment.
Importance of Insurance to the Economy
Encourages investment and savings, is a source of government revenue through taxes, creates employment, supports development, provides useful statistics to government and town planners, and some policies (like life insurance) can serve as collateral for loans.
Reasons Some People Avoid Insurance
Fear of never being indemnified, absence of insurance companies in some areas, ignorance about the benefits, reliance on extended family solidarity during hardship, poor advertisement by insurers, and the extra effort required to document a claim.
