In our day-to-day activities, we encounter many economic risks ranging from a car accident, sickness, house fire, and death among others. It becomes very expensive to address these risks in the event that they take place. As such, insurance companies were developed to help eliminate these risks and substitute uncertainty with certainty. Here, many people contribute to a common pool of funds and from this a few people who encounter the risks are compensated. This article provides you with all the information you need about insurance.
What exactly is insurance?
Insurance is a thing providing protection against a possible eventuality. In simple terms, it is a way to manage your risks. When you buy insurance, you buy protection against anticipated financial losses. The insurance company pays you if the eventuality insured happens. With no insurance and an accident happening to you, you may be responsible for all related costs unlike when you have insurance.
How insurance works
One must make contributions (premiums) to the insurance company (mostly monthly contributions) to be provided with cover against the risks.
To understand how insurance works, we first need to understand what a risk is. Simply put, it is a peril that the insurance company has agreed to provide cover for. There are many events that can be considered risks. For example, a vehicle accident is an auto insurance risk, and a policyholder’s death is a life insurance risk.
Several factors are considered in the calculation of insurance premiums
- The probability that a risk will be realized. The greater the probability, the higher the premiums
- The severity of damage if the risk is realized. Insurance will be higher if the policy is covering potentially catastrophic events like floods or earthquakes than when covering common risks like accidents
- The number of risks the policy is covering. A policy covering more risks will be more expensive than one that does not cover as many.
With an understanding of what a risk is, let’s now delve into how insurance works
First, it is important to know that an insurance policy is a legal contract between the policyholder (the insured) and the insurance company (the insurer). Therefore, it is important to understand the terms and conditions under which the insurance company is required to pay out the coverage either to the policyholder or beneficiaries.
In the event the risk occurs, the policyholder or beneficiary can file a claim with the insurance company after which the company will investigate the incident and based on the findings and approval, the insurance company will settle the claim.
Types of Insurance Policies in Kenya
There are many types of insurance policies. The most common are explained below;
1. Life Insurance
As the name suggests, it is a policy that one takes on their life. When you purchase a life insurance policy, your dependents get financial security even in your absence.
This insurance compensates the policyholder’s entire family if the policyholder dies during the term of the policy.
2. Health insurance
Just like other valuable assets, health is the most crucial aspect of one’s well-being. Getting this insurance is therefore very important because it helps provide financial assistance if anything serious happens to the policyholder.
This insurance covers unexpected hospitalization expenses, room expenses, nurse expenses, medical bills, ambulance costs, critical illness, personal accident death, and disabilities.
In most countries, policies are being formulated to make it a requirement to have health insurance coverage.
In Kenya, the government is advocating for every family to have active health insurance coverage.
3. Motor/Auto Insurance
This covers your vehicle from any third-party liabilities and damages caused by burglary, accidents, calamities, collisions or any other source. Selecting the right policy is crucial in order to ensure complete protection of your vehicle.
In many countries, it is a requirement by the state for every vehicle to have a minimum of third-party insurance.
4. Property Insurance
This type of insurance provides protection for your property and can also provide liability coverage. Can include renter’s insurance, homeowner’s insurance, flood insurance and earthquake insurance among others. This type of insurance covers replacement cost, actual cash value of the property and also extended replacement cost.
5. Travel Insurance
This type of insurance is not very common in the developing countries. It provides cover for any financial losses that may be due to loss of luggage or loss of passport or even any case of hospitalization emergencies during the travel.
Regulations and Legal Aspects of Insurance in Kenya
In Kenya, insurance is under the regulation of the state through the Insurance Regulation Authority (IRA).
The objectives and functions of the authority are
- Ensure effective administration, supervision, regulation and control of the insurance and reinsurance business in Kenya
- Formulate and enforce standards for the conduct of insurance and reinsurance businesses in Kenya
- License all persons involved in or connected with an insurance business
The insurance sector is regulated by law through the insurance act 2020 which can be found here: here
What are the benefits of getting insurance in Kenya?
Generally, insurance is a part of risk management tools that leads to one achieving financial security. Some of the benefits include
- Compensation in the event of a loss
- Provides financial security
- Promotes and instils a savings culture
- Reduces the social burden
- Provides comfort because of the securities that are provided
What is a type of insurance to avoid?
Because life is full of uncertainties, we want to be ready to cover our financial needs. As such, many insurance companies take advantage of this and are selling insurance policies that we do not necessarily need. However, if you still feel the need to purchase these policies, this article should not discourage you. Below are some policies that we are better off without;
- Private mortgage insurance
- Extended warranties
- Automobile collision insurance
- Rental car insurance
- Car rental damage insurance
- Flight insurance
- Life insurance for children
- Flood and earthquake insurance
- Credit card and credit card loss insurance
The details of why you are better off without these policies will be found in our next article.
What are the 3 most essential insurances for Kenyans?
Most experts have come to agree that life, health and auto insurance are the most important to have. Coverage by an employer is the best option but if that is not available, you’ll have to purchase the policies out of pocket.
As we have seen, insurance is a very essential tool useful to manage the risks in your life, property and assets and even your health. It provides you with financial security that helps take care of you in the event there is a misshapen. In the selection of an insurance policy, it is essential to evaluate and compare the different products and service providers to ensure they fit well with your needs and your budget.
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