What Is Insurance: Significance And Scope
This article is a broad-brush attempt to clarify the idea of insurance (at its most basic) from both a legal, but more importantly, a social standpoint. What is the point of insurance and how does it work? Also, it deals with the question of whether insurance is a form of gambling. This article, however, is not a substitute for legal or professional advice.
Fortunately, insurance is a term used and vaguely understood by almost everyone. We hear it in many aspects of life but usually it is used as a substitute for the word “collateral”, for example, “I will keep your watch as insurance for your promise to pay me next week” and in a way, it is exactly this. But the idea of insurance is much greater, and a general awareness of what precisely insurance is and how it works is crucial to our understanding of the legal and socio-economic dynamic of the world we live in today.
At its core, insurance is a means to protect oneself from fortuitous risks that may befall in one’s way in a given period of time. Although the loss may eventually never present itself, the risk of it happening is persistently there, irrespective of such a loss occurring. In other words, we pay a premium to the insurance companies (the insurers) in exchange for a promise by the insurers to make good for the potential loss, which we may or may not suffer.
In a way, insurance is like gambling, and there is a strong argument in favour of this. This is also the reason why many Islamic law scholars declare conventional insurance practices as haram.
If the loss we have insured for doesn’t take place naturally (that is, without the insured’s mala fide and deliberate contribution), the insurer wins i.e. he or she retains the premium without having to do anything. Of course, the legal position is that the insurer, by being at risk for the whole period of time, has duly given consideration for the contract. The promise to pay and the potential liability, in this case, is sufficient for a valid contract. Similarly, the insurer has provided the insured person mental calm and tranquillity that he or she is safe and protected if the loss occurs, and this can be taken as the due consideration.
If the loss does occur, it may be said that the insured wins. The insured gets the loss compensated for a significantly lower amount than what it costs the insurer to reinstate or make good the loss. In fact, this is the whole attraction of insurance; the fact that generally, the premiums paid by the insured are significantly lesser than the potential liability that the insurers face. For example, a basic health insurance could cost the insured a few thousand rupees per month but when calamity strikes, the insurer may have to pay in multiples of the premium. They might have to pay several lacs in way of treatment, tests and aftercare – the premiums then being a mere paltry sum in exchange for what the insurer might have to monetarily contribute.
The method that justifies and allows this approach is key in viewing insurance as a vehicle of social welfare, insurance being one of the key tools in alleviating societal and economic problems of today. Insurance companies aggregate the premiums of a certain type/class of insureds together. For example, if 50 people want to be insured for motor insurance (e.g. for damage to their car either by virtue of accidents or just for general upkeep of the car) with a specific insurer, these 50 people will form a specific class of insureds with that insurer. Let us say that each member of this class is paying Rs. 2,000 per month for a period of one year. This would cumulate into a pool of Rs. 12 hundred thousand that the insurer has at its disposal. From this class of 50, if five insureds have motor damages of approximately Rs. 50,000 each, over the course of the year, the insurer has liabilities amounting to Rs. 2.5 hundred thousand, and makes a profit of Rs. 9.5 hundred thousand. But of course, this is an oversimplification, notwithstanding the fact that the insurers are reinsuring their Rs. 12 hundred thousand potential liability and/or are investing this money in different ways. Also, not all insureds are paying a fixed premium, the premium varying on the basis of their individual factors such as the car make and model, the presence of airbags, the number of accidents you have had in the past, the purpose of the use of the vehicle, and so on. So the net profit made by the insurer may be significantly more than Rs. 9.5 hundred thousand. The idea of pooling a large sum of premiums, but receiving few claims may suggest that insurance is a gamble.
So is insurance a gaming contract? Although a gaming contract can itself be insured in many jurisdictions (not in Pakistan), there is a key difference between the two: in gambling, the risk is created by virtue of the gambling contract; in insurance, as was earlier stated, the risk is irrespective of the contract. For example, when two people bet on a horse, the risk of one person winning and the other losing is because of the bet itself, whereas, the risk of a house burning down or a ship sinking or a person dying is always present. But with insurance, such risks are mitigated by transferring them to a third party (the insurer), who theoretically is in a better position to deal with the consequence of the said risk. It may be said that if insurance is like gaming, in the micro level of things, the insurer may win or the insured may win – but there are never any losers. And this idea of there being no real losers is crucial in enabling insurance to help the society and to promote the economy.
As stated, insurance, being a tool of societal welfare, works by taking ordinary calamities and pitfalls of life and churns them into more palatable consequences. As a conclusory note, a few things are important. Of course, the underlying rationale with insurance is that getting a sizeable sum of money in return for damage to your beloved property, or in the extreme, the losing of a loved one, makes the consequence more palatable. Also, with the widespread use of insurance, there may be a large dependence on insurance, which may cause a person to be unduly negligent or even reckless. There are rules of causation, etc. that restrict recovery in such cases, but generally, people on the whole may be lax in behaving like prudent uninsureds in the reassurance of a subsisting policy, and this can lead to the opposite of what insurance seeks to do for society. Moreover, although the insurance industry can be viewed as a charity, the insurers are, at the end of the day, out to do business. Most insurance contracts are standard forms with little to no leverage for the insured to seek amendments. The insurers hold a strong bargaining position throughout the process. So it is only obvious that insurers fix high standards and conditions for claims actually to be met. In the pitfall, many consumer insureds and even business insureds may find themselves without insurance, despite having paid a premium and despite having a reasonable expectation of getting insurance monies, just when they need the insurer the most when the risk materialises.
The views expressed in this article are those of the author and do not necessarily represent the views of CourtingTheLaw.com or any other organization with which she might be associated.