Insurance funds are not unlimited; discipline in claims matters

By Anna Tibaijuka

Last week I explained why Tanzania remains underinsured and why insurance penetration is still very low. The key message was simple: we are living with high risks but very little protection.

Today I am address a widespread misunderstanding that is quietly damaging the insurance sector: The belief that insurance companies have unlimited money.

This belief is not correct—and if it continues, it will undermine the entire system. Insurance companies do not create money.

The funds used to pay claims come from premiums paid by ordinary people: workers, farmers, traders, and business owners.

In simple terms, insurance is a pool of money contributed by the public to support those who suffer losses. It is not free money. It is shared money.

Insurance works on a simple principle: many people contribute small amounts so that the few who suffer losses can be compensated.

For example, if 1,000 people contribute Sh100,000 each, the total fund becomes Sh100 million.

If only a few people suffer accidents, the fund is sufficient to compensate them.

This system works because not everyone suffers loss at the same time.

It is based on what economists call high risk but low probability. Events such as accidents, illness, fire, and death are serious, but they do not happen to everyone at once.

This allows risks to be shared across many people.

However, the system depends on balance. It cannot work if claims become too many, too large, or exaggerated. No system can pay out more than what it collects.

In Tanzania today, we are seeing a growing problem of unrealistic claims. Some claimants expect very large compensation, sometimes hundreds of millions of shillings, regardless of the level of insurance cover. This is especially common in third-party motor accident claims.

There is an important distinction that must be understood. A court may award compensation based on the damage suffered.

But an insurance policy pays only up to the limit agreed in the contract.

If the policy limit is Sh100 million and the court awards Sh300 million, the insurer will pay only Sh100 million. The remaining amount may be the responsibility of the vehicle owner or driver.

This distinction between legal liability and insurance liability is not well understood, and this misunderstanding is creating unrealistic expectations, prolonged court disputes, and pressure on the insurance system.

If insurance is treated as if it has unlimited capacity, the consequences will be serious.

Premiums will rise, insurance will become unaffordable, companies may withdraw from the market, and fewer people will be insured. Ultimately, it is the public who will suffer.

There is therefore a need for greater understanding of insurance principles within the legal system. Courts, lawyers, and claimants need to appreciate that insurance is a contract-based system with defined limits.

It is not an open-ended compensation mechanism. Another challenge is what economists call moral hazard.

This occurs when people take advantage of insurance because they believe someone else will always pay.

It can lead to exaggeration of claims, careless behaviour, and even fraud. This weakens the system for everyone.

Many people also rely on third-party claims after accidents instead of protecting themselves.

This is risky. Third-party claims take time, may be disputed, and may not be fully paid. That is why individuals should consider taking personal insurance, such as health insurance, personal accident insurance, and life insurance. These provide direct and reliable protection.

Insurance is not just a business. It is a collective system of protection.

When one person is compensated, the money comes from others.

Therefore, excessive or unrealistic claims affect all contributors. The way forward is clear. Tanzania needs stronger public education on how insurance works, better training within the legal system, control of fraud and exaggerated claims, and greater promotion of personal insurance products.

Insurance companies are not unlimited sources of money. They are custodians of funds contributed by the public.

If the system is misunderstood or misused, it will become expensive, shrink, or fail. But if it is respected and properly managed, it will protect society.

Next week I will examine how Tanzania can build a strong, inclusive, and sustainable insurance sector for the future.