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 July 17th, 2024
In business and social systems, there are a number of risks which, due to their nature, cannot be avoided or reduced. You and I, as economic units, have to live with them. From time immemorial, man has made attempts to shift such risks to those that are willing to assume them, through various instruments.
Ask any chief executive of a company that is listed on the local bourse, Malawi Stock Exchange, they will probably tell you that their major risk is loss due to under-subscription of share issue. In case of the first issue, one of the solutions is to raise the minimum subscription. If the price is not raised, the company risks winding up. This risk can be shifted to third parties, known as underwriters.
In securities market, underwriting means something different from what insurance people do. It refers to a contract between promoters of a public company and underwriters. The latter promises to buy shares not subscribed to by the public. In return, underwriters collect a commission. In this way, listed companies are able to get protection against the risk of under-subscription, which if not managed in time, can see a company closing shop.
Dear reader, most companies that you see in town are co-owned investments. A large number of persons put funds together in form of joint ventures. Each person contributes a small amount towards capital of the company. In insurance, such shareholders are said have limited risk. Stated differently, the risk of business loss is shared by the people, who put the funds into the pool.
Another common instrument of shifting risk is hedging. Hedging is not rocket science as most people think. It is a process of entering into two contracts of an opposite but equivalent nature. Hedging is aimed at protecting against losses that emanate from fluctuations in commodity prices. One is protected by shifting the risk by buying the instrument for future delivery. In essence, you are protecting (hedging) yourself against fall or increase in market price between two periods, the time you are buying a commodity and the time you intend to sell it.
Hedging works well in agricultural produce and precious metal markets. Agricultural commodities are notoriously vulnerable to change in season, buyers’ disposable income and production cost. For example, an agricultural trading company, like Admarc, can hedge against fall or increase in price of chimanga (maize) or the controversial thonje (cotton lint). Change in price can be hedged against, mainly between purchasing and selling time, when corn is in abundance and limited supply, respectively.
Parties (not political parties) that are involved in long term contracts, such as road or multi-storey building construction, have their way of shifting risks to other parties.
Take a case of new roads that are being constructed in the capital city, Lilongwe. The contractors, who were awarded the projects, are foreigners. But a number of Malawian firms are also involved in the projects as sub-contractors to supply of quarry, construct culverts and other related tasks.
Insurers view subcontracting as a way of shifting risks. For this reason, insurers require the main contractor should disclose name(s) of sub-contractors involved in any project that is proposed for insurance.
Insurance is another form of shifting risks. Premium is at the centre of the arrangement. Risks of individual parties are shifted to an insurer, who agrees to pay the former in the event of loss, damage or death of the subject matter. Consideration earned by insurers is called premium.
An important aspect of these methods of shifting risks is to identifying exposures. Individuals and businesses alike, may be exposed to different risks, depending on their political, economic, social, technological and legal environment and integration, both at home and workplace. The number one rule is that you and I, as economic units, need to identify, in particular, risks that may be difficult to measure, with low probability of occurrence, but rather high in terms of consequences. The instruments mentioned above, including insurance, come in to protect you against risks that bear low frequency and high severity permutation.
Views from the top are that although risks cannot be completely eliminated, sensible handling of same can help in minimizing negative consequences. One way of minimizing such negative consequences is through insurance. Talk to us. We are here to serve you.
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