Loopholes Faced by Pooling School and Transfer Schools of Thought.

Loopholes Faced by Pooling School and Transfer Schools of Thought to the Definition of Insurance

Generally, there exist different contending schools of thought that have come up with their respective explanation of what insurance is all about. Loopholes 

These schools of thought comprise different persons with their personal opinion with regard to what they see insurance as. There are the “pooling school of thought and the transfer school of thought”.

However, there exist some other views such as the sociological view and the Legal view.

All these groups of views affirm that insurance has encountered definitional problems owing to its inception.

Each group gives a detailed explanation of what insurance is all about, how it affects the group positively or negatively, and what the group expects from the insurance in return.

In most cases, some individuals may be interested in the role of insurance in capital formation, the procedure for premium distribution, and the nature of risk insured against

Note: Despite all the loopholes faced by pooling schools and transfer schools of thought in explaining what insurance is all about by different insurance viewers, they still arrive at a point where insurance brings about the following.

a. Risk redistribution

b. Uncertainty

c. Distribution of loss to the parties to the insurance

d. Premium {financial Assistant}

Loopholes Faced by Transfer School of Thought

The transfer school of thought explains insurance as a device for the reduction of uncertainty of one party, called the insured, through the transfer of particular risks to another party, called the insurer, who offers a restoration, at least in part, of economic losses suffered by the insured.

It was propounded by Irving Pfeiffer in 1856. Dickson, {1955: 26} defines insurance as a risk transfer mechanism whereby the individual or the business enterprises can shift some of the uncertainty of life on 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 to the insurers.

Insurance in this regard is a contractual relationship between two-party ” the insured” and ” the insurer”.

The insured plays its role by paying the premium agreed upon by the parties and keeping the contractual terms and conditions, the insurer undertakes to pay compensation in accordance with the contract terms should the insured event happen.

In conclusion, the transfer school of thought sees insurance from the perspective of a person transferring or shifting his economic loss or damage to property to another person {Insurance company}.

The insurance company defines a means to pay compensation to those who transferred their risk to the scheme should the risk insured happen. Pooling schools and transfer schools of thought to the definition of insurance have shared some similarities with regard to how compensation should be made.

Loopholes Faced by Pooling School of Thought

The pooling school of thought was propounded by Alfred Mannes {1935}.

He stated that the essence of insurance lies in the elimination of the uncertain risk of loss for the individual through the combination of a large number of similar, exposed individuals.

Some other people like Commack and Mohr {1976} in Falegan 1991: 18, define insurance as a device for risk reduction by combining a sufficient number of exposure units to make their individual losses collectively predictable and attainable.

The predictable loss is then distributed to all units involved. To the pooling school of thought, insurance can be viewed from the perspective of an individual faced with the uncertainty of losses agreeing with many other people similarly exposed.

The major similarity shared by the two schools which need not be pursued further is the fact of insurance has to do with a situation of uncertainty. In line with the explanation of risks discussed earlier.

The first definition takes the perspective of an individual facing uncertainties and transferring the risk of his activities to another party, the insurer.

This is the exact perspective referred to as insurance transfer of risk. For the individual concerned, his major challenge here is the payment of the premium to the insurer.

The internal business mechanism of the insurer is non of his business, whose concern is to ensure that there is always money to settle possible claims of the policyholder.

The premium is known as the cost to him, which is certain, instead of exposing himself to possible unknown losses. He enters into a contract with the insurer to the effect that should the peril insured against occur, his financial loss will be settled according to the terms of the contract.

The second definition speaks from the perspective of the insurer who is taking up the responsibility for settling possible losses arising from the risks he is accepting.

A careful study of the two schools of thought shows no conflict actually; each highlighting only one side of a transaction. There is zero pooling of risks if there is no transfer of risks to the insurer.

The following point emanated from the issue that there’s a transferor of risk, and a transferee of risk, and the larger the number of the transferors of independent homogeneous exposure units, the better the conduct of insurance for both parties to the insurance contract.

Loopholes Faced by The Sociological Approach to Insurance

This one of the insurance viewers views insurance as any mechanism designed to provide primarily financial assistance to persons that belonged to the scheme who suffered a loss arising from the insured event.

However, insurance in this regard involves any establishments hopefully arranged for loss sharing, risk redistribution, or reduction of the uncertainty of one person by a member of the scheme.

What is provided should the insured risk occur is financial assistance.

Invariably the financial compensation or benefit payable to the members of a scheme should the unwanted event happen in the social insurance such as extended family system, social club, Age grade association, Isusu system, and Afro system are good examples of insurance functions.

The Isusu arrangement comprises a group of people who accept to come together with the idea of each contributing to a common fund, a fixed amount on a pre-determined basis { monthly, weekly, or daily as the case may be}.

The accumulated fund at a particular period of time is given to one member to enable him/her to meet up some of his/her financial obligations and usually on a rotational basis. It is practiced majorly in Nigeria.

The extended family structure is based on mutual solidarity and serves as cooperative insurance due to the family fund pools.

Every income earner of the family contributes to the common fund which is used to educate and train the young members of the family or probably build a new family house or invest in some other project for the mutual benefit of such family in agreements.

In addition, it has been stated that anything that will contribute or offer individuals or organizations some financial security that may encourage them to continue with their business plan and livelihood is insurance.

Summary

Insurance has been explained in different ways by some people. There is the Transferring- school of thought, which was propounded by Irving Pfeiffers {1856} His explanation of insurance takes the perspective of an individual facing uncertainties and transferring the risk of his activities to another party, the insurer.

The pooling schools look at the perspective of the insurer who is taking up the responsibility for settling possible losses arising from the risks he is accepting.

The sociological approach looks at insurance as any mechanism primarily designed to relieve any individual who belongs to the scheme of any financial losses suffered while running his business.

In conclusion, any schemes that work outside the major principle of insurance such as insurable interest, utmost good faith, subrogation, contribution, indemnity, and proximate cause cannot be regarded as insurance. Pooling school and transfer Schools of thought to the definition of insurance have contributed their respective opinion on how best insurance problems can easily be resolved. Loopholes Faced by Pooling School and Transfer Schools of Thought.