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 are educative at all levels, catering to both practitioners and non-practitioners.
As published in The Daily Times (Malawi) on September 11th, 2024
Insurers never fail to amaze me. They have unique vocabulary. Frankly speaking, insurers have a liking for a language that ends up confusing the very customer they want to protect against unforeseen events. By the way, did you know that in insurance, the word risk has as many definitions as there are stars in the sky?
In any course of insurance that one may take, the starting point must be the concept of risk. You cannot talk about insurance without risk and vice versa. The terms risk and insurance are like Siamese twins. Risks that are associated with you, as an individual and the organization that you work for, are what keep some of us in town, without which we could have been in the village tilling the soil or kayaking canoes in the country’s rivers and lakes.
So what do insurers mean by the term risk?
For a start, usage of the term risk in daily conversation is different from that in insurance. The word risk appears at most to be context specific with each profession developing its own meaning, which is not necessarily in agreement with each other.
For insurance people, risk implies some form of uncertainty about an outcome in a given situation or circumstance. Risk refers to the cause of an outcome, which occasions an unfavorable result. For example, insurance practitioners speak of fire, road traffic accident, floods, drought, theft, suicide, just to mention a few, as risks. You may hear insurers using the phrase ‘the risk of fire to makuti or grass thatch building is high.’ Basically, what they mean is that the propensity to damage by fire to makuti or grass thatch building is above what is usual.
Risk may also mean an object or person. In this case, any item that is threatened by a peril is referred to as risk. If you visit an insurance company to insure your property, an underwriter will asks you to disclose details of the risk. Here insurers are interested in the subject matter of insurance that you are proposing cover for or to be insured, such as a car, dwelling house, livestock, a pair of spectacles, cell phone, machine, office documents or equipment, et cetera.
Risk also refers to the likelihood of an event happening. In the business of insurance, the probability or degree of a certain unfavorable outcome occurring in certain situations is of essence. For example, locking a car in a garage with working security alarm results in a lower risk of theft than leaving it outside the garage, in the open. In our homes, often than not, you hear mothers advising kids (and husbands) to sleep under a mosquito net or use repellants. The propensity of suffering from malaria is lower if one sleeps under a mosquito net than without.
Sometimes, insurers refer to risk as loss. Here the word risk denotes an outcome of an event or the aftermath of an operation of a peril. This outcome is usually adverse and represents an unfavorable position about the future.
Risk may denote action. In this case, it is the activity or undertaking that possesses some risk. Say, we might risk investing some money in a new business venture such as kaunjika or matumba, whose outcome will result into a loss.
We can see from the scenarios above that when risk is said to exist, there must always be two separate possible outcomes - bad or good. If we know in advance what the result will be, then there is no risk, regardless of whether there is a loss or no loss.
Looking at it differently, risk is a condition in which there is a possibility of an adverse deviation from a desired outcome that is expected or hoped for. Insurance people view risk as a condition of the real world.
As a general rule, the degree of risk is largely affected by severity and frequency. Whereas severity denotes magnitude or financial implications of a risk, frequency is the number of times that a risk occurs.
In insurance, both frequency and severity are important. Frequency helps insurers to predict occurrence of events so as to accurately compute equitable premium to cover unforeseen events. Similarly, severity enables both owners and insurers to decide whether to retain, avoid or transfer a risk.
Views from the top are that risks are a combination of the likelihood (frequency) of an event and the extent of financial loss (severity) should the loss occur. Talk to us. We are here to serve you.
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