Insurance school of Thought- 3 Major contenders

What is the Insurance School of Thought

Insurance has been explained in different ways by some people. They are pooling schools of thought and transferring schools of thought. there are other views such as sociological views and legal views.

These views suggest that insurance suffers definitional problems. Each group tries to explain insurance as it affects the group and what the group expects from insurance.

For instance, some persons may be concerned with the role of insurance in capital formation, the nature of payable benefits, and the type of risk insured against as well as the expectation of the operation.

All the groups ended up with the point that insurance brings about the education of uncertainty, risk redistribution, sharing of losses, and financial assistance.

The Pooling School of Thought

The chief proponent of the pooling school is Alfred Mannes 1935; 15. He states categorically that the essence of insurance lies in the elimination of the risk uncertainty of loss for the individual through a combination of a large number of similarly exposed individuals.

The definition of insurance also proposed by Commack and Mohr 1976: 18 was of the pooling school of thought. They define insurance as a device for risk reduction by combining a sufficient number of exposure units to make their individual losses collectively predictable. the predictable loss is then shared proportionately by all units in the combination.

To the pooling school of thought, insurance can be viewed from the perspective of a person faced with the uncertainty of losses agreeing with many other persons similarly exposed. Spreading of risk through reducing uncertainty and sharing of losses is the focal point of this school of thought and thus insurance is a pool of risk.

Transfer School of Thought

Irving Pfeifer 1856 is the founder of the transfer school of thought. he opined that insurance is a device for the reduction of uncertainty of one party called the insured through the transfer of particular risk to another called the insurer, who offers a restoration at least in part of economic losses suffered by the insured.

Also in line with the following perspectives, Dickson defined insurance as a risk transfer mechanism whereby the individual or the business enterprise can shift some of the uncertainty of life onto the shoulders of others.

In return for a known premium usually, a very small amount compared with the potential loss, the cost of that loss can be transferred and the insurer.

To this transfer school of thought, insurance can be viewed from a perspective of a person shifting his economic liability for loss or damage to property to another person, in this case, an insurance company.

Insurance, therefore, is a contract between the insured and the insurer (two parties). The insured discharges his obligation by paying the agreed premium and keeping the contract terms.

The insurer undertakes to pay compensation in accordance with the contract terms should the insured event happen. The insured is not essentially disturbed whether or not the insurer secures a substantial number of persons similarly exposed to the insurance scheme, technically called an insurance fund.

Thus, insurance makes provision to pay compensation to those who transferred their risks to the scheme should the risk insured occur.

Sociological Approach to Insurance 

The other view of insurance is the general view and it refers to any mechanism designed to provide primarily financial assistance to persons that belong to the scheme who suffer loss arising from an insured event. Insurance includes any scheme designed for sharing losses, redistribution of risk, or, reduction of the uncertainty of one person by members of the scheme. What is provided should the insured risks occur is financial assistance.

Invariably the financial compensation or benefit payable to a member of a scheme should the unwanted event happens in the social insurances such as extended family system, social clubs, isusu system, Afro system, Age-grade association.

It has been stated that anything that will offer individuals and organizations some financial security that may encourage them to continue with their business plan livelihood is insurance.

This general approach though very interesting cannot be quickly accepted as insurance. The insurance concept has legal principles which have been developed over the years and modified to achieve desired to impart and benefit society.

Any scheme not pursued according to the insurance principles such as insurable interest, utmost good faith, subrogation, contribution, proximate cause, and indemnity can be any other thing but not insurance principles which have been developed over the years and modified to achieve impart and to benefit the society.

Any scheme not pursued according to the insurance principle such as insurable interest, utmost good faith, subrogation, contribution, proximate cause, and indemnity can be any other thing but not insurance.

Legal View of Insurance

Legal views is another view of the meaning of insurance, that sees it as a legal contract. According to Ivany 1986; a contract of insurance in the widest sense of the term may be defined as a contract whereby one person called the insurer undertakes in return for the agreed consideration called the premium to pay to another person called the insured a sum of money on the happening of a specific event where the payment of the money or other benefits is discretionary and not obligatory the contract is not one of insurance.

Chilly defines a contract of insurance as one whereby one party called the insurer undertakes for a consideration to pay money or to provide services to or for the benefits of the other party called the insured upon the happening of an event which is uncertain either as to whether it has or will occur at all and as to the time of its occurrence.

So the general observation from the legal view of insurance concludes that insurance is only valid on the terms of the contract. To put it differently, the implied duties of the insured such as acting as if he were uninsured and taking all reasonable steps to minimize his loss, and expressed duties such as eschewing fraudulent means to obtain claims should be complied with.

The insured will also notify the insurer within the specified time of any event which could give rise to a claim under the policy. Again the terms and conditions of the insurance contract expressed in the policy documents will be obeyed. All of these explain the importance of an insurance contract.

The insured is advised to study the policy document with a view to comprehending the contract and imposed obligations and rights. this will go a long way in diffusing many misconceptions about insurance.

Finally

Insurance is a business that exists to propel the existence of other businesses. Different contending schools of thought have made a bold step to define insurance each person with his own view of what insurance is all about but in the end, all of them arrived at the point that insurance resolves round business of uncertainty, risk redistribution, loss sharing, and financial assistance.