THOMAS MASIFHI
LIISA, AIISA, FIISA, SEDP: BIHL Group Executive: Corporate Distribution and Stakeholder Manager
Many insurance buyers focus exclusively on the risks they are trying to protect against, often overlooking the fact that insurance companies themselves are exposed to various risks. These include:
1. Solvency Risk
This is the risk that an insurer may not have sufficient assets to meet its obligations to policyholders. An insurer facing solvency challenges may struggle to settle claims, particularly during periods of high claim activity or economic stress.
2. Investment Risk
Insurance companies invest premiums collected from policyholders to generate returns. Poor investment decisions, market volatility, or significant losses can weaken an insurer’s financial position and its ability to meet future obligations.
3. Asset-Liability Mismatch Risk
Insurers must carefully match their assets with their future liabilities. A mismatch can occur when the timing or value of investments does not align with expected claim payments, creating financial pressure when claims become due.
4. Pricing Risk
Insurance pricing requires an accurate assessment of risk. If premiums are set too low relative to the risks being insured, the insurer may face financial difficulties over time, potentially affecting its ability to pay claims.
5. Technical or Underwriting Risk
This arises when the insurer incorrectly estimates the frequency or severity of claims. Weak underwriting practices can result in losses that erode the insurer’s financial stability.
Questions Every Insurance Buyer Should Ask
Before committing to any insurance product, buyers should conduct thorough due diligence. Some critical questions include:
1. Will the Company Still Exist in 10, 20, or 30 Years?
Many insurance products, particularly life insurance, retirement products, Annuities/monthly pension payout and long-term savings plans, involve commitments extending over decades. The insurer’s long-term sustainability is therefore a critical consideration.
2. What Is the Insurer’s History and Track Record?
A company’s history can provide valuable insights into its resilience, governance, claims-paying ability, and commitment to policyholders. Longevity alone is not enough, but a strong track record often reflects stability and sound management.
3. How Strong Is the Balance Sheet?
The balance sheet provides an indication of the insurer’s financial strength. Buyers should consider the size and quality of assets, liabilities, reserves, and overall financial position.
4. Is the Company Well Capitalized?
Capital serves as a financial cushion against unexpected losses. A well-capitalized insurer is generally better positioned to withstand economic downturns, catastrophic events, and adverse claims experience.
5. Does the Insurer Have Strong Technical Capabilities?
Technical expertise is essential in underwriting, risk assessment, claims management, actuarial analysis, and product development. An insurer with strong technical capabilities is more likely to price risks accurately and manage claims efficiently.
6. What Is the Claims Settlement Reputation of the Insurer?
An insurer’s reputation for handling and settling claims fairly and promptly is often one of the most reliable indicators of service quality. Buyers should seek information from existing clients, industry reports, and regulatory publications where available.
7. How Strong Is Corporate Governance?
Strong governance, effective leadership, transparent reporting, and sound risk management practices contribute significantly to an insurer’s long-term stability and demonstrate the organisation’s ability to safeguard policyholder interests, comply with regulatory requirements, and respond effectively to emerging risks.
Looking Beyond Price
The temptation to choose the cheapest insurance product is understandable. However, the lowest premium does not necessarily represent the best value. A cheaper policy may come with weaker coverage, restrictive terms, or be backed by an insurer with limited financial strength.
The ultimate purpose of insurance is to provide peace of mind and financial protection when unforeseen events occur. Therefore, buyers should prioritize:
Conclusion
Insurance should be viewed as a long-term financial partnership rather than a simple purchase. The decision to buy insurance must be guided by careful evaluation of the insurer’s financial health, operational capabilities, and ability to fulfill future obligations.
A wise insurance buyer does not only ask, “How much does this policy cost?” Instead, they also ask, “Will this insurer be financially strong enough to honor its promise when I need it most?”
The quality of an insurance product is ultimately determined not by its marketing appeal or price, but by the strength, stability, and reliability of the institution standing behind it.
