The buying and selling of insurance is not merely a commercial agreement between a seller and a buyer, nor simply the payment of an insurance premium in exchange for an insurance policy. Rather, it is an economic and financial decision that requires the buyer to understand the nature of the risks they face, their financial capacity to absorb potential losses, and the type of insurance protection they actually need.
At its core, insurance is a process of transferring financial risks from the insured to an insurance company in return for a specified premium, subject to the agreed policy terms, conditions and exclusions. In certain circumstances, retaining the risk and bearing its financial consequences may be a more appropriate option, provided that the individual or organisation has sufficient financial resources, reserves and solvency to do so.
Before making an insurance purchasing decision, the buyer should ask four fundamental questions: First: Do I Really Need Insurance? Do I need another party, namely an insurance company, to indemnify me against potential financial losses in return for a specified insurance premium? Or do I have sufficient financial resources, reserves and solvency to retain and bear these risks myself without transferring them to another party?
Answering this question requires an objective assessment of risks and a distinction between risks that can reasonably be retained and those that should be transferred to an insurance company, particularly risks involving substantial financial losses that could threaten the continuity of an economic activity or the financial stability of a family or organisation.
Second: What Should I Do to Protect Myself and My Property Against Risks and Losses? What preventive and precautionary measures should I take to reduce the likelihood of a risk occurring or minimise its financial consequences? Insurance does not relieve individuals or organisations of their responsibility for risk management, nor should it be considered a substitute for prevention, safety and loss control measures.
On the contrary, effective risk management and loss prevention are essential elements of the insurance relationship and contribute positively to the level of protection and the sustainability of the insurance industry.
Third: What Does the Insurance Company Offer in Return for the Premium I Pay? What insurance coverage am I actually purchasing? What are the limits of the insurance company’s liability? What exclusions, deductibles, excesses and conditions are contained in the policy? Is the protection provided appropriate to my needs, the risks I face and the premium I pay?
The lowest premium should never be the sole criterion when making an insurance purchasing decision. Equal consideration should be given to the actual insurance value, quality of coverage, clarity of policy wording, efficiency and speed of claims settlement, and the insurance company’s financial ability to honour its contractual obligations.
This also highlights the importance of the role played by insurance brokers and professional insurance advisers. They should assist buyers in identifying their insurance requirements, understanding coverage and exclusions, and comparing available insurance quotations, thereby enabling informed purchasing decisions based on professional advice rather than price alone.
Fourth: Who Protects My Rights if the Insurance Company Becomes Financially Distressed or Unable to Meet Its Obligations? What financial and regulatory safeguards are available to protect policyholders and beneficiaries if an insurance company becomes financially distressed or is unable to fulfil its contractual obligations? What is the role of the regulatory authority in monitoring financial solvency, technical reserves and corporate governance? Are there legal mechanisms or policyholder protection or guarantee schemes, where applicable, to safeguard the rights of insured parties?
This question highlights the importance of an effective legislative and regulatory framework that protects policyholders’ rights, strengthens confidence in the insurance market, and ensures the stability of insurance institutions and their ability to meet their obligations to society.
It is important to emphasise that these four questions are not merely a checklist for individual consumers when purchasing an insurance policy. In essence, they represent a Due Diligence Exercise and constitute fundamental principles of Enterprise Risk Management (ERM).
This approach applies not only to individuals and families but also to government entities, private-sector companies, banks, financial institutions, insurance companies and reinsurance companies, although the nature of risks and the scale of responsibilities may differ from one organisation to another. Government entities need to assess risks relating to their assets, projects, financial commitments and operational activities. Private-sector companies must evaluate risks associated with their business activities, investments and business continuity.
Banks face credit, liquidity, market and operational risks, while insurance companies are exposed to underwriting, investment, liquidity, reinsurance and solvency risks.
Every organisation, regardless of its size or nature of business, needs to identify the risks it faces, assess their likelihood and potential financial and operational impact, and determine the appropriate risk treatment strategies. These may include risk avoidance, risk mitigation, risk transfer or risk retention, supported by effective monitoring, internal controls and business continuity arrangements.
From this perspective, purchasing insurance should not be treated as an isolated administrative decision or merely a routine operating expense. It should form part of an integrated Enterprise Risk Management strategy, aligned with corporate governance, managerial and financial accountability, and the interests of all relevant stakeholders.
Furthermore, risk management is not the sole responsibility of the insurance department or the risk management department. It is a shared organisational responsibility that starts with the Board of Directors and executive management and extends throughout all administrative and operational levels of the organisation.
THE INSURANCE ECOSYSTEM
The insurance relationship is not limited to the seller and the buyer. It is part of an integrated ecosystem involving the insured, who seeks financial protection and security; the insurance company, which accepts the risk in return for a premium; the insurance broker or professional adviser, who helps identify requirements and explain available coverage; and the regulatory authority, which supervises financial solvency, corporate governance, regulatory compliance and the protection of policyholders’ rights in accordance with applicable legislation.
This brings us to a fundamental question that deserves serious discussion: Does the consumer purchase an insurance policy because they understand their needs and risks, or simply because they are looking for the lowest insurance premium available in the market? The insurance industry is not merely about selling policies and collecting premiums. Its fundamental purpose is to build trust, promote a culture of risk management, and provide financial and social protection for individuals, businesses and society as a whole. The responsibility for promoting this culture does not rest with consumers alone. It is a shared responsibility among insurance companies, brokers, regulatory authorities, professional institutions and the media, through greater insurance awareness, transparency and disclosure.
Insurance is not a commodity whose value should be measured solely by its purchase price. Rather, it is a financial and social service whose true value becomes evident when a risk materialises, and when the insurer fulfils its promise of protection and indemnification at the very moment the insured needs it most.
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