Insurance is an instrument used to indemnify the insured from a potential loss. When the actual loss does occur, insurance cover ensures that the insured is reinstated back to their original financial position prior to when the loss occurred.
Over-insurance can be described as having excess insurance coverage/policies that covers the same risk or having insurance cover in excess (more than) of the value of the possible loss that the insured can experience. Over-insurance occurs when an individual or a business has insurance cover in excess of the value of the risk(s) covered/insured. In simple terms, this means that an individual or a business has insurance cover which exceeds the actual value of the insured asset (for example, (1) a property with a market value of N$ 2.5 million is insured under an insurance policy for N$ 4 million or (b) a vehicle with a market value of N$ 150,000.00 is insured for N$ 250,000.00). Most over-insurance cases are common in the short-term insurance market, however, over-insurance may also occur in the long-term insurance market, although, generally it is difficult to place a value on the life of a person. There are however, long-term insurance scientific underwriting principles used by long-term insurance companies to determine over-insurance for life cover and disability benefits.
Additionally, over-insurance can also occur if an individual or business has more than one short-term insurance policy covering the same risk.
WHY IS OVER-INSURANCE A PROBLEM?
Over insurance poses a moral hazard on the insured/policyholder, for example, if the insured would end up making a profit from the loss that can potentially motivate the insured to intentionally cause the loss in order to make or realize a profit. If the insured is merely placed back into his or her original financial position, and there is no profit to be realized from the loss, it is expected that such status quo is also likely to discourage the insured from making efforts or intentionally initiate an insurance claim by prompting a fictitious loss.
Some insurance policies have limits on an insured and should the insured suffer a loss, the insurer only pays out up until the maximum limit and should the insured have two or more policies say on a vehicle, only one policy shall become payable. In this case, the insured looses out on the insurance premiums paid for the insurance cover over the period. Furthermore, having too many insurance policies/covers and paying a lot of insurance premiums could strain the policyholder’s finances as the policyholder will have a low disposable income and will lose out on the interest that could have been earned had the money been invested in other investment instruments.
STEPS TO PREVENT OR ADDRESS OVER-INSURANCE
Consumers need to be pro-active with their insurance and financial needs. It is your responsibility to ensure that your insurance policies are taken out for the correct value and that you do not have excessive policies. You can do so by visiting your insurance agent or broker at least once a year to re-asses your financial needs as well as the value of your properties to ensure that you have appropriate insurance policies/covers proportional to the value of your asset(s).