By Coronation Inssurance
Wealth is generally built up and maintained over time by accumulating assets to generate even more income while also, ideally, limiting expenses and liabilities so that the assets built up can create more wealth.
However, all sorts of situations, changes and challenges occur that interrupt or prevent the build-up and re-investment of wealth. Despite the best-laid plans, life continues to happen and surprises. These surprises, called risks, often require diversifying resources away from wealth creation. In some cases, these unanticipated setbacks can be so significant, damaging, and costly that they destroy most or even all the accumulated wealth, ultimately preventing the ability to create and accumulate new wealth.
This is precisely the situation for which insurance was developed.
Insurance guarantees compensation for specified loss, damage, illness, or death in return for a fixed premium payment. In short, in return for allocating a small amount of wealth each month to an insurer to cover certain risks, when these risks materialise, the insurer provides the money or resources to return the insured to the position they were in before the loss. Insurance sustains wealth creation by removing the need for the insured to come up with the money or remedy for losing their wealth or resources.
In this sense, insurance is the trump card, or magic wand, that protects the process of wealth creation when disaster, the unexpected or the unaffordable arises.
The principle of insurance works on the idea that the good fortune of many covers, or indemnifies, the misfortune of the few. In other words, if hundreds of thousands of individuals, businesses, or organisations each make relatively small insurance contributions when trouble strikes a minority of the insured, there are sufficient funds in the collective pot for the contributions of the many to remedy the losses of the few.
Re-insurance, where individual insurers transfer the more significant risks on their books to multiple third parties, operates on a similar principle.
Risks like flood, fire or earthquake can potentially cause widespread damage to many policyholders simultaneously. These losses may be so significant that individual insurers might not have sufficient funds to compensate policyholders. By spreading these significant risks amongst other insurers through re-insurance, insurers deploy the trump card of insurance to help them compensate multiple clients simultaneously when important, catastrophic loss events occur.
Despite the proven value of insurance in creating and growing wealth by protecting assets and compensating policyholders for loss is often not recognised as a powerful wealth-creation tool. Instead, and indeed, in Nigeria, insurance is viewed at best as a grudge purchase, at worst, as a waste of money diverting resources away from the process of wealth creation.
When an earthquake hit Haiti in 2010, the World Bank reported less than 1% of the damage caused was insured. This left 99% of the losses for the government and Haiti’s people to stump up. Haiti is still suffering the impact of this disaster without any resources available. When New Zealand, on the other hand, experienced a similarly devasting quake in 2011, 81% per cent of the resulting direct economic losses, in the order of US$150 million, were covered by existing commercial property covers, with 80% of these losses assumed by reinsurers. The money provided by these insurers allowed immediate emergency responses and a quick rebuild of damaged infrastructure and property. Life insurance policies also compensate the survivors of those who lost loved ones in the tragedy.
The difference in impact and response of these two similar disasters highlights insurance’s importance in wealth creation and preservation. Far from being a grudge purchase that wastes money, insurance is vital to sustaining the ability to continue building wealth and managing risk even when disaster strikes.
In short, insurance is the trump card that makes the creation and preservation of wealth possible.
