Basic Principle of Insurance: Insurable Interest

Insurable interest is a core principle in the insurance industry that stipulates that a person or entity can only purchase insurance for a property, asset, or person if they stand to suffer a financial loss or hardship in the event of a loss or damage to the insured object or individual. This principle ensures that the insurance contract is based on a legitimate risk and prevents people from purchasing insurance on things in which they have no vested interest, thus avoiding fraudulent or speculative claims.

In the context of Ghana and Africa, the concept of insurance interest plays an essential role in promoting ethical insurance practices, protecting consumers, and ensuring the stability of the insurance industry. This write-up explores the concept of insurance interest, its importance, its application in insurance contracts, and its relevance to Ghana and Africa.

What is insurable interest?

Insurable interest refers to the legal right or financial stake a person has in an asset, property, or individual that justifies their purchase of an insurance policy for it. In essence, an individual or entity can insure something if they would incur a financial loss if the insured object were to be lost, damaged, or destroyed. Without insurable interest, an insurance contract would be considered void or unenforceable because the policyholder would not face any financial consequences if the insured event occurred.

For example:

• Property Insurance: A homeowner can insure their house because they would suffer a financial loss if the house were destroyed by fire or a natural disaster.
• In life insurance, a spouse can insure the life of their partner because they would suffer a financial loss in the event of their partner’s death, especially if they depend on that person's income for family support.

Key Features of Insurable Interest

1. Existence of Financial Stake:
• Insurable interest means that the policyholder stands to suffer financially from the loss, damage, or death of the insured item or person. Without this financial stake, there would be no justification for the insurance contract.
2. Must Be Legally Recognized:
• Insurable interest must be legally recognized under the laws of the jurisdiction in which the insurance policy is issued. For instance, in Ghana and other African countries, the concept of insurable interest is governed by the Insurance Act, and any policy written without a valid insurable interest could be rendered invalid in a court of law.
3. Time of Insurable Interest:
• For property insurance, the insurable interest must exist at the time the policy is taken out and at the time of a claim. For example, if a person sells a car but still has insurance on it after the sale, they no longer have an insurable interest in the vehicle, making the policy invalid for any future claims.
• In life insurance, insurable interest must exist at the time of policy issuance. For instance, a person may have insurable interest in their spouse or children, but not in a random individual with whom they have no familial or financial relationship.

Importance of Insurable Interest in Ghana and Africa

1. Preventing Fraudulent Claims
• Protecting insurers and consumers:
  The requirement for insurable interest helps prevent fraudulent activities such as "insurance fraud," where individuals might take out insurance policies on properties or lives they have no legitimate interest in, only to collect the proceeds from a claim.
• For example, in Ghana, a person cannot take out life insurance on a neighbor or someone they have no financial or familial relationship with, as there is no legitimate financial interest at risk. This helps ensure that the insurance market remains ethical, reducing the risk of fraudulent claims and ensuring fair treatment for all policyholders.
2. Protecting Against Speculation
• Discouraging Gambling on Losses:
  Insurable interest discourages speculative behavior, where individuals or entities might take out insurance on assets or people they have no connection to, solely for financial gain. For instance, someone cannot purchase fire insurance on a building they do not own, just in case it gets destroyed.
• In Africa, particularly in emerging markets like Ghana, this principle ensures that the purpose of insurance remains protective rather than speculative, preserving the integrity of the industry.
3. Regulating Risk
• Ensuring Legitimate Risk:
  Insurable interest ensures that only those who genuinely stand to lose financially are eligible to take out insurance. This aligns with the primary purpose of insurance, which is to protect people from financial losses due to unforeseen events.
• In Ghana, businesses and property owners must prove their insurable interest before they can insure commercial properties or assets, ensuring that insurance is used as a tool for risk management rather than speculative purposes.

Applications of Insurable Interest in Different Types of Insurance in Ghana and Africa

1. Property Insurance
• Homeowners and business owners:
  In Ghana, homeowners and business owners can insure their property (homes, shops, and commercial establishments) because they would suffer a financial loss if the property were damaged or destroyed. The insurable interest lies in the value of the property itself, which the policyholder stands to lose.
• For example, a person who owns a house in Accra can take out insurance against fire or flood because they would face a significant financial loss if the house were destroyed.
• Landlords and Tenants:
  In some cases, both landlords and tenants may have insurable interests in property. Landlords can insure the building itself, while tenants may insure their personal belongings within the rented property.
• In Ghana, this is particularly relevant in urban areas where many people live in rental properties. Landlords may need insurance for the building, while tenants may seek renters' insurance to protect their personal property.
2. Life Insurance
• Individuals and family members:
  In life insurance, individuals have insurable interest in their own lives as well as in the lives of their dependents, such as spouses, children, and sometimes business partners. The insurable interest stems from the potential financial loss a family or business could face in the event of the death of a key person.
• In Ghana, life insurance is commonly used to secure financial support for dependents in case of the policyholder’s untimely death. Family members often purchase life insurance policies for each other, particularly for breadwinners, to ensure that the family does not face financial hardships.
• Business Partnerships:
  In the case of key-man insurance or business partnership insurance, business owners can insure the lives of key partners or employees. The insurable interest here is based on the financial impact that the death or disability of a business partner or key employee would have on the company.
• In Africa, particularly in small and medium enterprises (SMEs), business owners may seek life insurance for important staff members whose roles are critical to the success of the business.
3. Health Insurance
• Insuring the Health of Individuals:
  Health insurance policies in Ghana and other African countries typically require the policyholder to have insurable interest in their own health, meaning they would face financial challenges if they were to fall seriously ill or face high medical costs.
• In Ghana, the National Health Insurance Scheme (NHIS) provides coverage to individuals based on their insurable interest in accessing affordable healthcare. This principle underpins the structure of the scheme, ensuring that people with health risks are adequately covered.
4. Motor Vehicle Insurance
• Car Owners and Drivers:
  Car owners have insurable interest in their vehicles, as they would incur financial loss if their vehicle is damaged, stolen, or involved in an accident.
• In Ghana, it is common for vehicle owners to insure their cars against accidents, theft, and damage. This is particularly important in urban areas with high vehicle traffic, as accidents are frequent.

Challenges of Insurable Interest in Ghana and Africa

1. Limited Awareness and Education
• Many people in Ghana and across Africa may not fully understand the concept of insurable interest or how it applies to different types of insurance. This lack of awareness can lead to misunderstandings and even non-compliance with insurance requirements.
• Insurance companies need to invest in educating the public about insurable interest and its importance in ensuring the legitimacy of claims.
2. Informal Insurance Practices
• Many individuals in Ghana and other parts of Africa rely on informal risk-sharing arrangements, which do not always adhere to the formal principle of insurable interest. These informal schemes often lack clear contractual agreements or legal enforcement, making it difficult to ensure that all parties have a genuine insurable interest.
• Integrating these informal practices into the formal insurance system while respecting the principle of insurable interest is a challenge for the growth of the insurance market.

Conclusion

The principle of insurable interest is a cornerstone of the insurance industry, ensuring that insurance policies are based on legitimate risks and preventing speculative or fraudulent claims. In Ghana and across Africa, the application of insurable interest in various forms of insurance—from property to health to life insurance—is crucial for maintaining the integrity of the industry and protecting consumers. While challenges such as low awareness and informal risk-sharing practices persist, there is significant potential for growth in the African insurance market through the proper application of this principle, ensuring greater financial protection for individuals, businesses, and communities.

Meet the Author

View Profile

---

Emmanuel Amoabeng Gyebi

Blogger

follow me