Meaning and purpose of insurance

Hello my dear students! Today, we are going to learn about something very important called insurance. This topic is very useful not just for your exams, but also in your everyday life in Nigeria.

Imagine you have a small shop in Balogun Market, Lagos. What if fire burns it down? Or what if thieves steal all your goods? This can cause a big loss, right?

That's where insurance comes in! It helps protect you from unexpected financial losses.

Let's start with the meaning of insurance.

### What is Insurance?

Insurance is a financial arrangement by which an individual or business (the insured) transfers the risk of potential financial loss to another party (the insurer) in exchange for a regular payment (the premium).

In simpler words, insurance is like a special agreement. You (the person or business) pay a small amount of money regularly to an insurance company. In return, if something bad happens that you are insured against, like your car getting into an accident or your shop burning down, the insurance company will pay you money to help cover your losses.

Think of it as pooling risks. Many people pay into a common fund, and the few who suffer losses get paid from that fund.

This helps to make sure that a sudden, big problem doesn't completely ruin you financially.

### Purpose of Insurance

Why do we need insurance? It serves several important purposes.

1. To provide financial protection and security: This is the main reason. If you have insurance, you know that if an unfortunate event happens, you won't lose everything you have.

For example, if your Okada is insured and gets stolen in Kano, the insurance company can pay for a new one, so you don't suffer a total loss.

2. To spread risk: Instead of one person carrying all the risk alone, insurance helps to share the risk among many people. Many people pay a little, so a few people can be compensated when they face big problems.

Imagine a community development project where many people contribute small amounts. This is similar to how insurance works.

3. To encourage savings and investment: Some types of insurance, especially life assurance, have a savings element. You pay premiums over time, and at the end of the term, you can get some money back, even if nothing bad happened. This encourages discipline in saving.

This is like some contribution schemes (esusu) popular in Nigeria, but with added protection.

4. To facilitate trade and commerce: Businesses feel more confident to take risks, like transporting goods across states or importing goods from abroad, when they know they are insured against potential losses like theft or damage.

If a company in Aba is sending goods to Abuja, marine cargo insurance can protect them against loss during transit, making them more willing to trade.

5. To provide capital for economic development: Insurance companies collect huge amounts of money as premiums. They don't just keep this money; they invest it in various sectors of the economy like infrastructure, manufacturing, and real estate.

So, insurance companies like AIICO, NEM Insurance, or Leadway Assurance invest in Nigerian businesses, helping the economy to grow and create jobs.

6. To reduce anxiety and provide peace of mind: Knowing that you are insured against potential disasters brings a sense of calm. You can focus on your work or studies without constantly worrying about what might go wrong.

If your house in Port Harcourt is insured against flood, you'll worry less during heavy rains.

7. To promote employment: The insurance industry itself creates many jobs for people, from insurance agents to actuaries and claims officers.

Many Nigerians work in insurance companies across the country.

So, you see, insurance is a very important tool that helps individuals, families, and businesses in Nigeria manage financial uncertainties and contribute to national development.

Make sure you understand these points well for your exams!

Till next time, keep studying hard!