What is INSURANCE?
Insurance is a means of protection from financial loss. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss.
An entity which provides insurance is known as an insurer, insurance company, or insurance carrier. A person or entity who buys insurance is known as an insured or policyholder. The insurance transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer’s promise to compensate the insured in the event of a covered loss. The loss may or may not be financial, but it must be reducible to financial terms, and must involve something in which the insured has an insurable interest established by ownership, possession, or preexisting relationship.
The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated. The amount of money charged by the insurer to the insured for the coverage set forth in the insurance policy is called the premium. If the insured experiences a loss which is potentially covered by the insurance policy, the insured submits a claim to the insurer for processing by a claims adjuster.
Reasons people buy Insurance in Nigeria
Most people buy insurance for four main reasons:
To protect something they have purchased that has a high value (such as a house, a car or perhaps jewellery or a painting) and which would be expensive to replace. Often a loan has been taken out to purchase the items
To protect their property and possessions against a disaster, such as a fire, flood, cyclone or other calamity
A specific event
To protect them when they are doing something not covered by their normal insurance policies, such as traveling overseas
To provide financial protection if sued – for example, if a visitor should sue you for negligence after injuring themselves on your property
Protecting what’s important
When you take out an insurance policy, you need to do some thinking about what is important to you, and how much you are willing to put aside to protect those things if you were faced with their loss.
Most people are willing to pay an insurance premium to protect things such as their home and its contents, their car, boat or caravan. Business owners will usually also take out insurance cover to protect assets and stock, and to provide financial help if they face legal issues.
Choosing an insurance policy is a matter of identifying what’s important to you.
Some forms of insurance are compulsory. For instance, state and territory governments require car owners to buy mandatory motor vehicle accident personal injuries insurance when they register their cars to protect any person they might injure while they are driving. Business owners have to pay premiums into their state or territory workers’ compensation scheme for their employees. And property owners taking out a home loan with less than a 20 per cent deposit may be required by their lender to buy Lenders Mortgage Insurance.
What can you protect?
You should consider general insurance when the cost of a particular financial risk is much greater than the cost of protecting yourself against that risk.
A risk must be able to be valued in monetary terms for it to be included in an insurance policy. It must also be an uncertain risk, something that we can’t be sure will happen.
You must also have a direct interest in any loss that you insure against. You can’t take out house and contents insurance on the home of your neighbor, for example.
Nearly anything that is valuable can be insured, but in practice, most insured items share the following characteristics:
the loss or damage has a reasonable dollar value
the risk being covered could happen across a large number of people (such as theft, fire, car accident)
the premium is cost-effective