Does insurance really work, who is the real beneficially?

By Yahya Kasujja

trueWhether insurance really works is a question commonly asked by most Ugandans, this explains the low numbers in terms of insurance coverage.

There seems to be strong belief that insurance companies do not indemnify (pay) in case of losses, in fact many believe that you can’t get your claim paid by insurance unless you go through courts of law. However some people fear insurance only because they think insurance is very expensive and some just do not understand what insurance is all about.

Let’s first understand what insurance is: Insurance refers to any form of arrangement where persons (individual and/or companies) contribute resources with a purpose of ensuring that any member who incurs a loss can be compensated from the pool. Please note this is Kasujja’s definition but most books define insurance as “the transfer of the risk of a loss, from one entity to another in exchange for a small payment” I disagree with this but that’s not the purpose of this article.

Let’s go back to our question; does insurance really work, if your question is whether insurance companies pay, I am testimony to the fact that it does. I have never owned a car and forgot to insure it for the last six years, to date I have paid less than UGX5,000,000 in premium but received more than UGX10,000,000 in compensation from different insurance companies, so “Yes” insurance pays.

Is insurance expensive, again I will use my car insurance as an example, at only 4% of the car value, I insure my car comprehensively against all potential risks. To put it into perspective, let’s use the former VP Bukenya’s premio as an example, assuming its value is UGX10,000,000 he has to pay UGX400,000 per year, roughly UGX 34,000 per month only for comprehensive insurance. Is that too expensive knowing that in case you lost your car the insurance company would give it back to you because you gave them UGX 400,000 at the beginning of the year?

Who is the real beneficially of insurance? I would love to think that I the insured are the sole beneficially  of this arrangement but looking around town it’s clear that the insurance companies are making a killing evidenced by the rate at which they are putting up structures you do not have to look at their financials to know how profitable this business is. The fact is conventional  insurance is more of a gamble where the insurance company dares you that the risk you worry about won’t happen and if you still believe it will happen all you have to do is to bet a small sum, if it happens they will compensate you with the full value of your loss. In most cases the insurance company wins because the probability of most of these risks occurring is always very low.

Now if you hate gambling but you still need insurance there is an option for you; you can choose to go back to the original methods designed by the founders of insurance called Community Self Insurance. A group of people contribute funds to one pool, any risk presented by any given person is assumed collectively by the community who all bear the cost of rebuilding lost property and supporting people whose needs are suddenly greater after a loss of some kind.

This method can be easily used for example by traders through their association to insure their businesses or by the village community through contributing food into granaries put aside to aid them in case of any calamity. The great advantage is that incase no loss is incurred all the contributed resources remain assets of the entire group unlike conventional insurance where this would belong to the insurance company.

The writer is a member of the Association of Chartered Certified Accounts (ACCA), Institute of Certified Public Accountants of Uganda (ICPAU) and holder of a Masters Degree in Business administration MBA from Edinburgh Business School – Herriot Watt University UK. He is a current student of Islamic banking.

Email; ykasujja@gmail.com