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Demystifying insurance

By Michael F. Rellosa

PIRA Executive Director

THIS is my 37th year in an industry that has been in existence for hundreds of years. Yet I still find myself trying convince people that insurance is an efficient but underrated method of protecting one’s hard-earned assets. Creating or building one’s assets is a topic that gets a lot of attention; so bankers, capitalists, businessmen and their ilk are deemed sexy, but insurance? Forget it, nobody gives a second thought about insurance unless it is mandated or until people want to collect the proceeds of a claim.

Unbeknownst to many, however, insurance is part and parcel of the financial world and the world economy would grind to a halt if it were not for insurance. No banker would lend money or give credit if the borrower does not put up something he owns as collateral. Furthermore, bankers are shrewd individuals and they make sure that these assets put up as pledges to loans are insured and thus protected against perceived risks such as fire and its allied perils. So, no insurance, no loans; no loans, no capital; no capital, no goods, machinery and labor. I may be oversimplifying things, but that’s because I want to make insurance understandable to all.

We live in a country that is the third most vulnerable to catastrophic perils, after two tiny Pacific island nations with populations less than that of a single Philippine municipality. Our archipelago lies smack in the middle of a typhoon highway and along the earth’s most seismically active region known as the Pacific Ring of Fire. We are visited by no less than 22 typhoons every year, and tremors and volcanic eruptions are common occurrences. We have a population of over a hundred million where a majority live and work in densely packed cities such as Metro Manila. Can you imagine the extent of damage that can occur should a major typhoon or the dreaded “Big One,” an earthquake generated by the West Valley Fault System, happen? However, these are not the only risks that we face. There are many others such as road accidents, pandemics such as the one we currently find ourselves in, liabilities that we may be exposed to because of our profession, business, or even our personal lives.

Living is fraught with danger and we must be able to manage the multifarious risks that we face. Sure, there are many things that we can do to address this. If we do not want to contract the dreaded coronavirus or get run over by a bus, we stay home and thus avoid it. If we don’t want our homes burgled or our cars stolen, we can always wire them with alarms and CCTV and spend our resting hours eyes glued to the monitor and ears to the alarm system just to make sure. If we do not care about any of these, we don’t do anything, only to rue the day the Big One happens and we lose our hard-earned house that we spent years furnishing and beautifying, in an instant. These methods of handling risks on its own or taken in various combinations, are well and fine but may be impractical at times and are not the only answer.

Tired of worrying about a possible loss of your assets and tired of avoiding, mitigating and/or retaining these risks for yourself? There is one other risk handling method to add to your toolbox called risk management and this is risk transfer, aka insurance.

What if you just wanted to enjoy the fruits of your labor without worrying about what may happen to it and where to get the funds to rebuild, replace or repair it should any of the dreaded perils occur? Then transfer the risk to someone else whose business it is to assume those risks and pay you the monetary equivalent of your loss, or at least repair or restore your property to the condition it was in, immediately prior to the loss. This, in a nutshell, is what insurance is all about. For a small amount, called the premium, the insurer assumes the risks that you used to face on your own, and you are assured of keeping your assets or at least its value intact for yourself and your heirs.

There are many kinds of risks that one can protect one’s assets from, but that will have to wait as I have already run out of space.


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