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 isolated incident of fire destroying property, eventually led to 4 days of destruction across the narrow streets of London. The only reprieve came in the form of large-scale demolitions of property to prevent the fire from spreading any further 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 in opinion of insurance being no longer a matter of convenience but one of urgency. Over 13,000 houses had been destroyed, and unknown number of lives lost.
That kind of unpleasant imagery seems like the kind of anecdote delivered by an insurance peddler with bad taste seeming to scare you into buying a policy for something that might happen. So I apologize for opening with it, however, I raise it only to make a few observations about our view of insurance.
Firstly, if we consider the conditions that led to the fire of 1666, we can see that they were not very difficult to identify with the benefit of 20-20 hindsight. According to reports, many wooden buildings as far as the eye could see had been rendered tender dry. Narrow streets meant a fair wind could blow a spark from one flammable structure to another. However, people went about their daily business without a care in the world. This shows us how the human mind is usually focused on the task at hand. It’s not natural for us to respond with urgency to possible dangers that for all we know might never happen.
Not only is it not a matter of urgency, it’s upsetting to think about losing property, falling sick or worst of all losing one’s life. We tend to hope for the 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 reasons the fire burnt for so long and grew as much as it did is the hesitation on the part of the authorities. Prompt action is the surest way to mitigate the effects of risk. Translated to our own lives, perhaps you have already experienced a startling loss, a robbery, a health scare for which you had no cover. Perhaps it’s been a few months and this is behind you but you worry that it might happen again. The best way to manage this is to act. Speak to an insurer, consult as many as possible and treat it as a means of preventing any further fires from spreading.
The last lesson we learn from the great fire is one, our own situation closer to 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 in the country from 0.85% to 3% by 2025, the duty to educate comes together with the responsibility to teach people how to minimize the probability of loss. Many people see insurance as a costly endeavor covering something that might not happen and see that money in opportunity cost terms-a car they could have bought, a piece of land, you name it. Further complicating this, a recent KPMG survey conducted in 2016 shows that fraud is a big concern for many insurers insist Africa and Uganda in particular. I think we need to look closely at the fraudulent claims. Is it a matter of dubious individuals seeking to game the system 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’s more easily understood and appreciated financial cousins, Insurance doesn’t proffer an immediate benefit, it doesn’t money in the hands of the user. It is supposed to be the fall back, the way to ensure that when disaster strikes, you’re not taken back to the drawing board. It’s therefore imperative that we talk about it as much as possible, and equip ourselves with the information we need so that all we’ve worked doesn’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 to the life or property insured. This is determined by the relationship between the beneficiary and the insured person or property. This makes it different from gambling in which for example, one can bet on Manchester United and win without having any real stake in the club.
Accidental loss-The event that leads 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 in power to prevent.
Calculable loss-The probability of loss and the cost of that loss must be one that can be estimated. Probability of loss is generally an empirical exercise, while cost has more to do with the ability of a reasonable person in possession of a copy of the insurance policy and a proof of loss associated with a claim presented under that policy to make a reasonably definite and objective evaluation of the amount of the loss recoverable because of the claim.
Proximate cause- the cause of loss must be covered under the insuring agreement of the policy, and the dominant cause must not be excluded. For example, when insured against fire, if the fire is caused by electrical failure this must be disclosed.