In an exciting collaboration between Minet Malawi, Britam, and The Daily Times - Malawi's leading newspaper - we are thrilled to introduce a groundbreaking initiative that will redefine your Wednesdays. Welcome to the Insurance Insights Column – a weekly rendezvous with the world of insurance and contemporary issues that matter. Every article aims to illuminate the intricate landscape of insurance products and relevant topics that impact us all. The articles will be educative at all levels, catering to both practitioners and non-practitioners.
As published in The Daily Times (Malawi) on March 6th, 2024
In our column, last week, we identified five areas of 2024/2025 national budget that are likely to delight the insurance fraternity in the market. We singled out construction, mega farming, mining, pension and gratuity as game changer sectors for insurers. However, we advised that insurers, as service providers, need to understand the gymnastics that are involved in procurement of insurance by the public in order to garner and harness opportunities set in the 2024/2025 fiscal plan.
We cited institutional arrangements and level of trade-off as two factors that predominantly affect the level of insurance consumption in Malawi.
The other factor is government policy. In Malawi, motor insurance, for example, is compulsory as per Road Traffic Act. It is the most popular form of insurance in the market. It accounts for more than sixty percent of the market’s non-life premium. Research has revealed that the public buys motor insurance not because they want to, but because it is mandatory. For one to drive on a road, to which the general public has access, one needs to have third party insurance as minimum cover. Conversely, it is not mandatory to buy householders or plate glass insurance. Government policies certainly determine our choices vis-à-vis income spent on insurance.
Premium is another influential determinant. Using purchasing habit of insurance, insurers put consumers of insurance in two categories - risk lovers and risk averters. Risk lovers are those that hardly insure. They usually carry risks themselves. Risk averters, on the other hand, are those that advocate risk transfer mechanism.
Market for insurance exists because of the fact that some people in our communities are risk averse. The bigger the population of risk averters, the larger the insurance market and vice versa. In absence of risk averse attitude, there will be no insurance at all. Despite this, insurance proposers will take insurance only if they are eclipsed in a certain bracket of circumstances that consequently trigger the level at which they first buy insurance - breakeven point.
In construing the extent to which an individual is risk averse or risk taker, economic theory demands existence of three factors, namely - average cost, expected loss and probability of an event occurring. Expected loss is defined as the average monetary loss that is incurred if the event takes place weighted or multiplied by the probability – likelihood - that the event will occur.
Let’s say the likelihood that a vehicle in Malawi is damaged in road accident is five percent and average price of such vehicles is K30million. The expected loss is clearly K1.5million. Using this example, a prudent insurer will only accept K1.5million and above as premium to cover anticipated damages. Obviously, if the expected loss is below K1.5million, an individual will be more willing to assume the risk himself than pass it to an insurer.
In this regard, premium is taken to denote the expected cost for rectifying the financial loss in the event that an insured peril operates. At this premium level, it is important that the insurer collects more to create and sustain the common equitable pool. Our insurer, above, must collect at least K1.5million in premium for all vehicles with sum insured of K30million from car owners just to have sufficient money to pay those who claim for road accident damage given five percent likelihood of occurrence - suffice to mention that K1.5million is just a break-even point. The insurer needs to effect extra charges to cater for administrative costs and mark-up for profit. In Malawi, administrative cost for motor insurance is estimated at twelve and half percent. Benchmark profit margin is ten percent.
This truism is upheld by one of the tenets of insurance that small losses do not create sufficient risk aversion to make up for the administrative costs incurred by insurers. The marginal propensity of risk aversion needs to be relatively high to cover administrative costs.
Logically, the lower the sums insured, the higher the excess or deductible imposed on the insured. In view of this, insurers do not favor small sum insured property.
As we round off the topic, we invite the insuring public to always talk to and use competent insurance practitioners to structure their insurance programmes.
Insurance is a science not an art
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