I have often wondered – where did the concept of insurance originate? Some trace it as far back as Greek or Roman times when it was used to support the families of deceased members rather than relying on rulers to provide for them.

Fast forward to the early 1800s, when the Industrial Revolution was sweeping the globe, and the need to protect and compensate parties for accidents and reduce financial loss became increasingly important to the wealthy (Swiss Re, 2021).

Well, after that little history lesson, let’s face it – insurance is one of those expenses that often annoy people. It adds no immediate value to the bottom line and feels like a “just-in-case” expense. However, if you ask family or friends, you’ll likely hear that at some point in their lives, they were grateful to have insurance to cover a person or a property.

In our family, we follow the traditional approach to coverage: car insurance, home contents insurance, and life insurance for both my husband and I. Our view, particularly regarding life insurance, is that if either of us were to die before retirement, the surviving spouse would have enough to retire immediately and live comfortably.

At the same time, our assets are protected – our car is insured in case of an accident, and the contents of our home are covered against loss, fire, or theft. As we don’t own a home, we don’t need home insurance, but if that ever changes, we will make sure to have coverage in place as well.

From my perspective, insurance is one of the best risk management tools available. It minimises the financial impact of loss and serves as a protective shield against unforeseen events, offering financial stability and peace of mind to individuals and companies.

Here are six reasons why insurance is a good risk management tool:

1, Financial protection against losses

One of the primary benefits of insurance is financial protection. Whether it’s health insurance covering medical expenses, auto insurance protecting against vehicle damage or liability, or property insurance safeguarding homes and personal belongings, insurance policies provide a financial safety net. In the event of an unexpected incident – such as an accident, theft, or natural disaster – having insurance can significantly mitigate financial losses.

2, Peace of mind

I know it sounds slightly cheesy, but it’s true – insurance instils a sense of security and peace of mind. Knowing that you are covered against potential risks alleviates worries about what might happen in the future. This psychological benefit is especially crucial for individuals with families or dependents. For example, life insurance assures policyholders that their loved ones will be financially taken care of in the event of their passing.

3, Encouragement of savings and investments

Certain types of insurance, such as life insurance, can include savings or investment components, depending on the policy type. These policies help policyholders accumulate wealth over time while also providing coverage. This dual approach encourages individuals to save and invest, fostering a healthier financial future.

4, Legal requirement and business enhancement

In many industries, having certain types of insurance is not just a matter of risk management – it’s a legal requirement. For example, auto insurance is mandated in most places, and businesses often need liability insurance to operate legally. For companies, having insurance can also reassure clients, making them more likely to engage in transactions knowing there is coverage against unforeseen events.

5, Support in crisis management

When disaster strikes – whether it’s a health crisis, natural disaster, or accident – insurance can be instrumental in recovery. Insurance providers assist policyholders through the claims process, helping them navigate the complexities of rebuilding. This support can include not only financial aid but also access to resources. For companies, insurance can mean the difference between a temporary setback and permanent closure.

6, Access to quality healthcare

Health insurance plays a crucial role in ensuring access to quality medical care. With rising healthcare costs, having insurance often determines an individual’s ability to seek timely treatment without incurring excessive financial burdens. Insured individuals are more likely to seek preventive care, adhere to treatment protocols, and receive necessary medical attention – ultimately leading to better health outcomes and a healthier society.

However, it is also essential to recognise that managing risk through insurance is not just about protecting your property or your life. Depending on your position within a company, you also need to ensure adequate insurance at the top.

For example, directors and officers insurance is designed to protect the personal assets of corporate directors and officers if they are sued for alleged wrongful acts while managing a company. This coverage can help defend against claims made by shareholders, employees, vendors, or other parties, such as allegations of negligence, misconduct, or fiduciary breaches.

Similarly, if you work in the professional services field, professional indemnity insurance provides coverage against claims of negligence, errors, or omissions that may arise from professional services or advice. This type of insurance is widespread among the following professions:

• Medical professionals (doctors, nurses)

• Legal professionals (lawyers, paralegals)

• Financial advisers and accountants

• Architects and engineers

• Consultants and IT professionals

Insurance has many benefits, and although the cost may sometimes feel like a wasted annual expense, it is minimal when you consider what you are insuring.

Remember, insurance serves as a crucial safety net in our lives, providing financial security and peace of mind while safeguarding our assets. It is not just about managing risk – it’s about protecting what matters most and contributing to a more stable future for ourselves and our loved ones.

Furthermore, it is a fundamental component of responsible financial planning that everyone should consider.

Reference

Swiss Re (2021): Beginnings of a modern insurance market. Swiss Re. Available from: https://www.swissre.com/dam/jcr:e8613a56-8c89-4500-9b1a-34031b904817/150Y_Markt_Broschuere_UK_EN.pdf [Accessed 22 February 2025].

• Carla Seely has 24 years of experience in international financial services, wealth management, and insurance. During her career, she has obtained several investment licenses through the Canadian Securities Institute. She holds the ACSI certification through the Chartered Institute for Securities and Investments (UK), the QAFP designation through FP Canada, and the AINS designation through The Institutes. She also holds a master’s degree in business and management