Elements that make risks insurable

1. It must be fortuitous in nature
For a risk to be insurable, there must be an element of uncertainty whereby the unfortunate may happen or may not happen. That uncertainty element allows the insurer to predict by the use of the law of large numbers and probability theory, that from a homogenous group transferring their risks, a given percentage might incur losses, and from the contribution of the homogenous group, the insurer can compensate the few amongst them. If it were to be certain that all of them will suffer a loss, what amount of provision can any Insurer make? The Insurer would rather be making more than 100% provision leaving the Insured or risk transferor exposed to the payment of an uneconomic or unreasonable premium.

2. There must be insurable interest
The risk must also have an insurable interest element. By insurable interest, we mean the legal relationship possessed by that person willing to buy insurance or transferring the risk in the subject matter of the insurance contract, to the extent that if the risk happens, he or she will suffer financially. For example if a lady bought a bag for N10,000, and If at the bus stop a thief suddenly snatched it and ran away, she would have suffered to the extent of N10,000.

The insurable interest in that bag, is what she suffered financially(i.e N10,000.00) by theft of the bag. From the above illustration, one can see the theft risk resulting in a financial loss of N10,000.00 being the value of the lady’s bag and which therefore makes it insurable. If there was no insurable interest ab-initio, then the risk of theft to which the lady and her bag were exposed will not be insurable. You must always find yourself in a legally recognised position that will expose you to some financial loss if the subject matter of the insurance contract is destroyed or lost either as a result of fire, theft or accident.

3. Public policy
It must not be against public policy to insure against any risk, e.g gambling, court fines and penalties. For example, if one is charged for committing any criminal act, the risk of any fine or penalty imposed following conviction cannot be transferred or insured. It is not done. It would be against public policy for such things to be legalized or encouraged. It could also lead to disorder on a large scale in the society, thereby exposing people to unnecessary danger. For example, If anyone kills and can insure against whatever damage or fines that will be imposed, then the crime of killing people on the grounds that insurance cover can be procured will create insecurity in the society .

Benefits of insurance
You will appreciate that if not for insurance, probably there will not have been any economy, because all facets of our lives are exposed to one risk or the other. Insurance has therefore remained one of the modern methods by which risk can be handled or treated.

How can risk be handled?

Risk transfer mechanism
The most modern and scientific way of handling an insurable risk is by transferring it to a professional risk carrier, that is, to an insurance firm. That is the best way to insure against your risk which will give you peace of mind. If one wants to venture into a business and there is no insurance protection, such ventures will not be secured. That is why when one is venturing into a business, and an approach is made to the bank, it is not uncommon for the bank to demand for your insurance as part of their collateral. So insurance all over the world , is the most modern and scientific way of handling risk (i.e Risk transfer mechanism.)

Another method of handling your risk is by self-insurance.
This is the practice when one decides to retain or carry his risks and the consequential financial effects by himself. If over time, one can define his risk exposures, and can conclude that in the last three years, I have suffered this amount of loss in naira terms, and, in another three/ four years, if that trend continues or persists, one can choose to bear the risk and the consequences. Going by this experience, one can therefore set aside a small budget or savings from which to meet losses in the event of any unfortunate incident.

Another method is risk avoidance
Here you can choose to avoid risk but it retards development. If you want to avoid the risk of accident, you won’t leave your house. So you have restricted yourself to accident in the house which can be minimal or if one wants to avoid motor accident, you don’t go on the high way or join any transport, nor drive any motor vehicle. One can see by implications that one’s movement is restricted, while you cannot pursue any venture or achieve progress or growth.

Captive insurance
Another example is for a group of companies that can do self-insurance to come together and put in place a captive insurance arrangement whereby all members of the group can contribute to the common or central pool , from which any member of the group can be compensated in the event of a loss.

The way forward
My advice is that people should recognize the existence of risk in all human endeavors and pursue pragmatic steps to handle their risk exposures. So it could be a combination of methods, either by risk transfer, that is buying insurance or you retaining some of the risks yourself (Self Insurance). It is not the best policy not to embrace insurance. It will also not portray any managerial prudence for any one or a corporate body not to operate a functional insurance philosophy.