Over-Insurance – What Is Over-Insurance?

Understanding Over-Insurance and Its Impact

Insurance is a financial instrument used to indemnify or compensate the insured in the event of a potential loss. When a loss occurs, insurance ensures that the insured is reinstated to their original financial position, as it was before the incident.

Over-insurance occurs when a person or business has insurance coverage that exceeds the actual value of the insured asset or risk. In simpler terms, it means having more insurance than necessary.
Examples of Over-Insurance
While over-insurance is more common in short-term insurance, it can also occur in long-term insurance (e.g., life or disability cover). Long-term insurers apply scientific underwriting principles to assess the appropriate level of cover and avoid over-insurance.
  • A property with a market value of N$2.5 million insured for N$4 million
  • A vehicle worth N$150,000 insured for N$250,000
  • Having multiple short-term insurance policies covering the same risk
Why is Over-Insurance a Problem?
  • Moral Hazard: Over-insurance can tempt policyholders to profit from a loss, which may increase the risk of intentional or fraudulent claims.
  • Limits on Pay-outs: Insurers typically only pay out up to the actual value of the loss, regardless of how much cover you hold. If you have multiple policies on the same asset, only one policy may pay out.
  • Wasted Premiums: Paying for excess or duplicate coverage results in unnecessary financial strain—money spent on excess premiums could otherwise have been saved or invested.
  • Lower Disposable Income: Excessive insurance premiums reduce your disposable income, limiting your ability to meet other financial obligations or build wealth.
How to Prevent Over-Insurance
To ensure that your insurance is adequate but not excessive, take the following steps:
  • Review your policies annually with your broker or agent. Ensure your cover reflects the current market value of your assets.
  • Avoid duplicating cover on the same asset. Make sure you understand the scope of each policy to prevent overlapping risks.
  • Understand your financial needs and adjust your policies accordingly as your life or business situation changes.
  • Get professional advice to ensure your cover is proportional and aligned with your actual risk exposure.
Over-insurance not only leads to wasted money but also creates ethical risks and financial inefficiencies. Responsible insurance management starts with awareness and proactive policy review. Ensure your insurance cover is suitable—not too little, and not too much—for peace of mind and financial security.
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