Compulsory insurance

Compulsory insurance
See also
Surplus lines Franchise insurance Pure risk Aggregate Limit Illegal work Commercial lines Combined single limits Net line Civil Commotion

Compulsory insurance is an insurance policy that is required by law. Therefore, any business or individual is has to buy that type of insurance. Compulsory insurance is used in areas where multiple people or businesses take risky activities. The most common example is driving a car or running a business with employees. That type of insurance is regulated at the government level, but it is sold by multiple insurance companies. Thus prices of compulsory insurance can differ (unless defined by the legislation). In some cases it is possible to buy policies with increased limits, higher than compulsory (R. Schwarze & G. G. Wagner,2007; s. 403-415). Compulsory insurance can differ in different countries. For example, in some countries farmers are required to insure against low yields caused by weather conditions. In some countries this insurance is mandatory for every fram owner, having an minimum 1ha area of agricultural land.

Vehicle insurance

One of the most popular compulsory insurance is the veahicle insurance. Known also as a car or motor insurance. It is a legal requirement to have an insurance policy if you are the owner of any vehicle. If someone got an uninsured motor or car he is breaking the law no matter if he drive it or not. The owners of vehicles are required to purchase mandatory third party insurance in order to be able to register a motor vehicle. Generally the average driver of a car underestimates the benefits of this insurance. If you are injured party of accident a Compulsory Third Party Insurance covers the repairing cost of the car and medical treatment expenses which can be the result of an accident. Newrtheless, If you you are involved in accident that was your fault, your insurance will cover damages caused other party of this accident. Unfortunatelly, in this case losses inurred by you will not be covered. It is woth noting that not in every country motorcyclists are required to insure, or the compulsory insurance is limited to only more powerful bikes.

Employers’ liability insurance

Another example of compulsory insurance is the empoyers' liability insurance. The Great majority of employers is required by the law to insure against liability for illness or injury, sustained as a result of work. Employers are responsible for health and safety of their empoyees at work, so it is a legal requirement to obtain employer's liability insurance with an authorised insurer. This insurance protects empoyers from the cost of compensation claims arising from employee injuries or illness. The compensation amount may take into account things like medical and, legal costs and even a loss of income.

Criticism of compulsory insurances

The arguments regarding to compulsory insurance vary greatly. In case of mandatory insurances social security systems are considered as organizations which provide a minimum amount of financial security to accident victims. Without such protection victims would be exposed to enormous costs of hospitalization. Nevertheless, for entrepreneur such insure could be a significant problem. Business owners usually looking for ways to reduce expenses. In certein industries, insurances can be vary hihg, esecially in professions which requirers risky activities. Ofen mentioned disadventage is the fact that the amount of insurace fees is not proprtional to offered extend of protection. This kind of policy cover the cost of the other person's car and medical expenses, but not yours. It also useless in case of car theft or fire damage (M. G. Faure, 2006; s.1-10).

Examples of Compulsory insurance

• Third-Party Car Insurance: Third-party car insurance is compulsory in most countries. It is a type of insurance that covers the liability of the insured person to a third-party in the event of an accident. This type of insurance covers costs related to property damage and injuries to third-party persons involved in the accident.
• Employer’s Liability Insurance: This type of insurance is compulsory in many countries for businesses that employ workers. It covers the liability of the employer to a third-party in the event of an accident in the workplace or due to the negligence of the employer.
• Professional Liability Insurance: Professional liability insurance is a type of insurance that covers the liability of a professional person to a third-party in the event of errors or omissions in their work. It is compulsory in many countries for certain professions, such as doctors, lawyers, and accountants.
• Home Insurance: Home insurance is compulsory in some countries, such as the United Kingdom, for people who own their own home. This type of insurance covers the cost of property damage caused by fires, floods, and other disasters. It also covers the cost of replacing stolen items.
• Motorcycle Insurance: Motorcycle insurance is compulsory in many countries for people who own a motorcycle. This type of insurance covers the liability of the insured person to a third-party in the event of an accident. It also covers the cost of replacing or repairing the motorcycle in the event of an accident.

Advantages of Compulsory insurance

Compulsory insurance provides numerous advantages to businesses and individuals. These benefits are:

• Ensures financial security: Compulsory insurance ensures that any financial losses incurred by certain activities are covered by the policy. This helps to protect individuals and businesses from potentially large financial losses.
• Offers peace of mind: Compulsory insurance provides individuals and businesses with the peace of mind that comes with knowing that they are protected in the event of any damage or loss. This can help to reduce stress and worry.
• Covers legal requirements: Compulsory insurance helps to ensure that individuals and businesses are meeting their legal requirements. This helps to protect them from any potential fines or penalties.
• Increases trust: Compulsory insurance policies help to increase trust between businesses and their customers. Knowing that businesses are insured will help to reduce any concerns that customers may have about their safety.
• Offers flexibility: Compulsory insurance policies often offer a range of different coverage options. This can help to ensure that individuals and businesses are covered for any potential risks that they may face.

Limitations of Compulsory insurance

One of the limitations of compulsory insurance is that it doesn't always provide the same level of protection as voluntary insurance policies. This can be due to the fact that compulsory policies often have lower limits and more restrictions than voluntary policies. Here are some of the other limitations of compulsory insurance:

• Compulsory insurance policies are often more expensive than voluntary policies. This is due to the fact that the insurance company needs to cover the cost of complying with the government regulations associated with compulsory policies.
• Compulsory insurance policies may not cover all of the risks associated with the activity or business. This is because the government may not deem certain risks to be important or relevant enough to require insurance coverage.
• Compulsory insurance policies may not provide enough coverage in the event of a loss. This is because the policy may have a low limit on the amount of coverage that can be provided.
• Compulsory insurance policies may not be tailored to specific needs. This is because the government may set the parameters of the policy and the insurance company may not be able to make any changes.

References

• Buzzacchi L. & Valletti T. M. (2005). Strategic Price Discrimination in Compulsory Insurance Markets, The Geneva Risk and Insurance Review, 30: 71–97,2005 The Geneva Association
• DeNavas-Walt C. (2005). Income, Poverty, and Health Insurance Coverage in the United States, Current population Reports, Consumer Income; U.S. Department of Commerce, Economics and Statistics Administration, U.S. Census Bureau
• Faure M. G.(2006).Economic Criteria for Compulsory Insurance',The Geneva Papers, 2006, 31, (149–168); The International Association for the Study of Insurance Economics 1018-5895/06 $30.00
• Leblois A. & Quirion P. (2013). Review Agricultural insurances based on meteorological indices:realizations, methods and research challenges, Meteorological applications Meteorol. Appl.20: 1 – 9; Wiley Online Library
• Rogan P.(2017). The Insurance and Reinsurance Law Review, Fifth Edition; Gideon Roberton
• Schwarze R. & Wagner G. G.(2007). The political economy of natural disaster insurance: lessons from the failure of a proposed compulsory insurance scheme in Germany, European Environment, 17(6), 403-415.

Author: Aneta Walczyk