Lessons from the Great Fire of London. Why insurance matters
Early on Sunday morning September2nd, a fire broke out at Thomas Farriner’s bakery in Pudding Lane in1666 London, at the time, Europe’s largest city. After a couple of rainy summers,a drought had set in since November 1665. What could have been an isolatedincident of fire destroying property, eventually led to 4 days of destructionacross the narrow streets of London. The only reprieve came in the form oflarge scale demolitions of property to prevent the fire from spreading anyfurther than it already had.
Subsequently, in the plans for the rebuilding of the city, Sir ChristopherWren, included a site for the insurance office and this reflected the change inopinion of insurance being no longer a matter of convenience but one ofurgency. Over 13,000 houses had been destroyed, and unknown number of liveslost.
That kind of unpleasant imagery seems like the kind of anecdote delivered by aninsurance peddler with bad taste seeming to scare you into buying a policy forsomething that might happen. So I apologize for opening with it, however, Iraise it only to make a few observations about our view of insurance.
Firstly, if we consider theconditions that led to the fire of 1666, we can see that they were not verydifficult to identify with the benefit of 20-20 hindsight. According toreports, many wooden buildings as far as the eye could see had been renderedtinder dry. Narrow streets meant a fair wind could blow a spark from oneflammable structure to another. However, people went about their daily businesswithout a care in the world. This shows us how the human mind is usuallyfocused on the task at hand. It’s not natural for us to respond with urgency topossible dangers that for all we know might never happen.
Not only is it not a matter of urgency, it’s upsetting to think about losingproperty, falling sick or worst of all losing one’s life. We tend to hope forthe best but find it hard to finish the maxim by planning for the worst.
The second lesson we can learn from this is risk management. One of the reasonsthe fire burnt for so long and grew as much as it did is the hesitation on thepart of the authorities. Prompt action is the surest way to mitigate theeffects of risk. Translated to our own lives, perhaps you have alreadyexperienced a startling loss, a robbery, a health scare for which you had nocover. Perhaps it’s been a few months and this is behind you but you worry thatit might happen again. The best way to manage this is to act. Speak to aninsurer, consult as many as possible and treat it as a means of preventing anyfurther fires from spreading.
The last lesson we learn from the great fire is one, our own situation closerto home can stand to take a leaf from; that prevention is better than cure. Oftused as a cliché’ by our doctors and teachers encouraging us to be prepared,this has lasted in our cultural lexicon for a reason. It’s simple yet profound.While insurance companies make advances to raise the insurance penetration inthe country from 0.85% to 3% by 2025, the duty to educate comes together withthe responsibility to teach people how to minimize the probability of loss. Manypeople see insurance as a costly endeavor covering something that might nothappen and see that money in opportunity cost terms-a car they could havebought, a piece of land, you name it. Further complicating this, a recent KPMGsurvey conducted in 2016 shows that fraud is a big concern for many insurers inEast Africa and Uganda in particular. I think we need to look closely at thefraudulent claims. Is it a matter of dubious individuals seeking to game thesystem only or it a misunderstanding of the basic concepts of insurable interest,utmost good faith, accidental loss, calculable loss and proximate cause? (See footnotes)
Unlike credit and Savings, insurance’ more easily understood and appreciatedfinancial cousins, Insurance doesn’t proffer an immediate benefit, it doesn’tput money in the hands of the user. It is supposed to be the fall back, the wayto ensure that when disaster strikes, you’re not taken back to the drawingboard. It’s therefore imperative that we talk about it as much as possible, andequip ourselves with the information we need so that all we’ve worked fordoesn’t go up in flames and we’re left with nothing to start with again.
Insurable interest- The beneficiary must have a stake in the loss or damage tothe life or property insured. This is determined by the relationship betweenthe beneficiary and the insured person or property. This makes it differentfrom gambling in which for example, one can bet on Manchester United and winwithout having any real stake in the club.
Accidental loss-The event thatleads to the loss must be outside the control of the beneficiary of the insurance.Basically, the loss must result from an event which the beneficiary was inpower to prevent.
Calculable loss-The probabilityof loss and the cost of that loss must be one that can be estimated. Probabilityof loss is generally an empirical exercise, while cost has more to do with theability of a reasonable person in possession of a copy of the insurance policyand a proof of loss associated with a claim presented under that policy to makea reasonably definite and objective evaluation of the amount of the lossrecoverable because of the claim.
Proximate cause- the causeof loss must be covered under the insuring agreement of the policy, and thedominant cause must not be excluded. For example, when insured againstfire, if the fire is caused by electrical failure this must be disclosed.