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MANY of
us have some form of property and casualty insurance, or
more commonly referred to as nonlife insurance. We
probably have motor-car insurance, fire insurance or
personal-accident insurance. However, I dare say that so
many of us who do have some form of coverage are not
really aware what this form of insurance is all about.
When you
compare life insurance and property and casualty
insurance, you will notice that the only thing similar
with them is the term “insurance.” Let’s try to
demystify property and casualty insurance.
So what
is property and casualty insurance? Property and
casualty insurance is an agreement whereby one
undertakes for a consideration to indemnify another
against loss, damage or liability arising from an
unknown or contingent event. The definition is clear
about how property insurance operates. For the insured,
it means that the agreement is merely to help him
recover what was actually lost due to the unknown or
contingent event. A contract of indemnity is therefore
exclusive to property insurance.
Why is
there a need for this type of insurance? Well, for
starters, it really is a risk-distributing device. A
person puts money called premium to a common fund and
distributes his risk to the group. There is no way for a
person to know in advance whether he will receive
compensation more than he has contributed or that he
will be merely paying for the loss of others.
The
primary goal of a person getting insurance coverage is
to assure himself that he will not shoulder the loss
alone. He may gamble, take his chance that he may be
able to steer his property away from a loss and its
devastating effect. But putting a minimum amount, and
considering that such amount is the only sum he is bound
to lose in case a loss actually occurs, is the logic
behind getting protection for your property. However, it
is unfortunate that most Filipinos still cling to his
fatalistic philosophy of bahala na. When the loss
happens, it is already too late.
Risk is
an everyday reality. This is the reason people make
calculations instinctively to avoid risk. They forget
that their own negligence (lack of foresight, lack of
skill to prevent loss) is the paramount reason why
property insurance is there in the first place.
Aside
from its primary function, property and casualty
insurance also has other functions.
It
stimulates business enterprise—Insurance has made
possible and helps maintain the present-day large-scale
commercial and industrial organizations. It enables them
to use their capital in the development of their
business and obtain financial security against risks,
instead of freezing business capital just to guard
against various contingencies. Because of reduced risks
also, capitalists are able to venture into other
projects.
It
stimulates business efficiency—Since businesses can
worry less about losses, they can concentrate more on
the prosecution of their business.
Promotes
loss prevention—Insurers allow taking risks from
well-maintained and quality machineries, equipment or
properties.
Investment of funds—Insurers accumulate large funds and
these are invested in the economy. Moreover, the funds
of business enterprises do not remain static but are
used productively, resulting in lesser premiums.
Moreover, the process produced by business is reduced,
benefiting the public. Although cost of insurance is
integrated in the prices of commodities, the amount is
significantly lesser than the amount without insurance.
Basis of
credit—Credit extension is the most important phase of
modern business and is contributed to by virtually all
forms of insurance. Thus, in the case of a mortgage upon
a real estate, no mortgagee is willing to lend money
unless he knows that the value of the property is
protected from destruction.
Surely,
the foundation and purpose of property and casualty
insurance is really much more complex that what was
explained here. One also needs to understand about risks
and hazards to be able to have a better appreciation of
insurance.
Risk is
the chance of loss. If a loss is absolutely certain to
happen, no risk is involved. Peril is the contingent or
unknown event which may cause a loss. The peril is that
which is insured against because without such peril, the
risk is absent. Examples of perils are fire, flood,
accident, theft, illness, etc. The insurance company can
choose what perils it will be willing to except the
insured from. This is what is also termed as insurable
risk. But risks, to be insurable, must meet certain
requirements:
Importance—The loss to be insured against should be
grave enough to support a contract of insurance. Not all
losses would have to be insured. The object must have
some economic value, so that losing it would put the
insured in some degree of pecuniary disadvantage.
Calculability—The loss must be possible to estimate as
to its probability. This is particularly important in
order to determine the amount of premium and the amount
to cover, so as to protect the insurance industry.
Definiteness of loss—The losses should be fairly
definite as to cause, time and place.
No
catastrophic loss—This is against the law of large
numbers. When large numbers of people are subject to the
same kind of losses at the same time, insurance becomes
a risk-accepting business rather than a
risk-distributing device. The losses of the few are no
longer borne by the many who did not suffer a loss. Only
small occasional losses are insurable.
Accidental in nature—Insurance is intended to cover
accidental or unexpected losses. If the loss is not
accidental, sudden or unexpected, there is definitely no
risk. Payment made to a party whose loss is expected is
contrary to public policy and morals.
The
perils that conform to these requirements are proper for
supporting an insurance contract.
Hazard,
on the other hand, is the condition or factor, tangible
or intangible, which may create or increase the risk
from a given peril. Hazards are what create a peril,
which, in turn, creates a risk. In the insurance
environment, hazards are:
Physical
hazards—those relating to location, structure,
occupancy, exposure to the surroundings and other
similar things like inherent vices that make the thing
very susceptible to loss.
Moral
hazards—those relating to the mental attitude of the
person.
Morale
hazard—pertains to the attitude or character of a
person.
Whew,
this column has turned out to be a minilecture on the
fundamentals of insurance. Since we pay good money to
get such insurance, isn’t it about time we start
understanding what we have been paying for all these
years? I think so.
****
J. Randell Tiongson is a training specialist,
personal-finance educator and coach and a director of
the Registered Financial Planning Institute. He has been
engaged in the various facets of the financial-services
industry for nearly two decades. He is also the
cofounder of www.income-tacts.com with Efren Ll. Cruz,
an interactive site dedicated to the financial literacy
of every Pinoy. For inquiries, you may send an e-mail to
randellt@gmail.com. |
