Drawbacks of Insurance
Along with the advantages, there are various drawbacks as well for insurance. The drawbacks include:
- Does not ‘reduce’ risk: Insurance is only a risk transfer mechanism, but that does not mean that the chances of the loss arising have reduced.
- The complexity of contract: The insurance policy is a detailed document containing various terms and conditions, which a layman might not understand, hence he might land up purchasing a policy at unfavourable terms.
- Not worthwhile: Insurance for high probability, small losses is not worthwhile for the amount of premium that the individual has to pay. Also, he may ignore the low probability and high losses for which insurance is always a good idea.
- Volatility: Volatility arising due to market crashes may affect big corporations, and they might not be able to honour their commitment during such times.
- Moral Hazard: Once the individual gets insured, he might become ignorant towards the safety of the insurable interest. In cases where the insured didn’t take appropriate measures to safeguard the insurable interest, the insurance company may even refuse compensation.
- Wastage of resources: An individual has to pay hefty sums as premiums for the policy, but he might never be able to make a claim, in case financial loss due to a covered event does not arise.
