THE FALLOUT FROM CLICO

Mar 07, 2009 Features / Columnists, Peeping Tom

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A young businesswoman’s home was destroyed by fire this week. She was devastated by her losses which we are told ran into millions of dollars.

This person had worked hard for what she had and yet it all disappeared in the fire. That must have been heart-wrenching for her. One only hopes that she had adequate fire insurance coverage, and that she would be indemnified.

It is when misfortune strikes that we recognise the value of insurance. Yet, there are many Guyanese who are averse to insurance and to taking out insurance. I have always felt the opposite, and have always recognised the great comfort that having adequate insurance provides.

All of us are exposed to the risks of fire, some of us more than others. It is a statistical fact that each year persons will lose their property in fires. And they will thus suffer material losses. It may be you; it may be me; it may be someone else. It certainly will not be everyone, and this is why the probability of a person losing their home to fire is called a risk. If such destruction was a certainty it would not be referred to as a risk.

We all are exposed to this risk, and for a small premium each year we seek to ensure that, should we be the unfortunate one that suffers loss to fire, we would be able to recoup our losses through the insurance that we have taken out. This is the basic principle upon which insurance is based. All are exposed to a risk, but only a few will suffer losses. However, everyone contributes to a common pool so that they can have coverage against the risk.

I wish to make this basic principle more graphic, because I believe there is a grave misunderstanding about insurance in Guyana, and that tens of thousands of Guyanese have misapprehensions about insurance and actually only take out insurance because they are obligated to do so, either under the law, as in the case of motor insurance, or in order to secure loans they may have taken from the banks.

I believe if there were a better understanding of the importance of insurance, then more and more Guyanese would ensure adequate coverage for themselves, their loved ones and their possessions against the multiple risks, including the risks of accident, fire and death.

Insurance operates on a very simple principle. Let us suppose that there are ten thousand households in a community. And let us suppose that the pattern of fires in this community is that there is one fire each year for every ten thousand households. Now let us suppose that all the households in the community are the same, and each is valued at $100,000. This means that the risk is that someone will lose $100,000 each year due to a fire.

Now, if each resident had to set aside $100,000 just in case it was his or her home that suffered calamity, this would prove an onerous if not impossible burden. However, if every home contributed to a pool of money from which whoever suffered losses would be compensated, it would be much cheaper and practical for all concerned.

In the example used, if each household were to contribute a mere $10 per month, it would mean that at the end of the year, there would be $100,000 available from the pool to pay for the anticipated losses that would be expected to take place. And this is the basic principle upon which the insurance industry rests. All insured persons contribute to a common pool which ought to be sufficient to pay for projected losses. In return for a premium, each insured person is guaranteed coverage.

Of course, insurance companies, in order to reduce the premiums, have to invest them to earn income. And as we have seen in the case of CLICO (Guyana), some of these funds have been invested outside of Guyana, and it is the impairment of these funds from which the insurer gains income to pay claims which has forced the mismatch between assets and liabilities.

Having fire insurance safeguards a homeowner against the risk of fire; having life insurance provides security in case a loved one were to die suddenly; having motor insurance allows for you to settle your liabilities and expenses in case you are involved in an accident on our roads.

Insurance is vital to this economy. Without it, companies would be forced to increase the cost of their goods and services, since they would have to constantly set aside amounts to act as a cushion for future risks. And families could lose their homes if a policyholder suddenly dies and leaves the household unable to service a loan for which a policy of insurance would have provided security.

One can only hope, therefore, that the fallout from the CLICO (Guyana) fiasco would not further erode public confidence in insurance. For the loss of such confidence can be catastrophic. One of the important things therefore for those dealing with this crisis to appreciate is the possible fallout it will have for the image of insurance in Guyana. I hope that is recognised, and that action is taken to stem any erosion of confidence in the industry.

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