The dilemma that is insurance

“Bold print giveth and the fine print taketh away!”

Anonymous Insurance Agent

I don’t really understand insurance. I know I am not alone.

To my simple way of seeing things insurance is basically people like me, who don’t get embroiled in never ending shenanigans, having to indirectly fund people who are repeatedly tormented by the Gods or their own stupidity. All the while the company takes a crooked cut from both of us.

One positive is that if you live simply enough, and you are not attached to material possessions, then you don’t really need contents insurance. There is nothing important to be stolen, nothing that you must replace after a fire and nothing to be ruined in a flood. If you view everything you own as for sale or temporarily borrowed there is no point paying someone to protect them. One mental trick that I use is to view an item as already broken in the moment that I acquire it.  Seeing yourself throwing away a dull bent or broken thing can help you to avoid the allure of the beautiful shiny new thing that you desire. Seeing it as broken also helps you deal with the event when it actually does break. That moment can pass harmlessly.

Still even the uber minimalist among us have some stuff, however few, however basic and so some level of contents insurance is advisable. Even if you would view the loss of all your possessions as the final giant unclutter you would still need a few clothes for your back and some simple cooking equipment. Having insurance would help.

While I am ambivalent about contents insurance I am not so when it comes to home insurance. The risk of course, if your home were not insured, is that you return home from work one day to find a jet plane engine has fallen from the sky and flattened your house.  This would leave you with mortgage payments on a property that you can no longer use, and at the same time trying afford living costs somewhere else.

So insurance helps me mitigate the risk of having to make two large payments to buy one house. Still can insurance costs be reduced, neturalised or tuned to profit? If you are wondering where insurance sits on our framework it is in reduce mode right now.

There are of course many ways to avoid insurance like renting a house and riding a bicycle instead of owning your house or operating your own car. That way your landlord can deal with the scoundrels of actuary and you don’t have to.

There are also ways to minimise insurance by actively managing your behaviour to reduce premium costs or by picking policies that better fit your needs. For instance you could chose Fire, Flood and Theft insurance (FFT) instead of complete cover. FFT provides cover for 90 % of claims..the most likely things that can go wrong, but not the jet plane scenario if it were to happen. The main benefit is that FFT is significantly cheaper than full cover. It’s the odd ball catastrophic unpredictable risks (that virtually never happens) that drives your insurance premiums. If you are prepared to take the risk that a drunk driver won’t put his car through your lounge wall next Friday night then you can potentially save a lot in insurance payments.

But at the root of it if you own a house you need insurance cover and if you own a car you need third party insurance (as a minimum). This is and unavoidable life cost unless you like la pari! (to gamble).

I’ve racked my brain on the insurance obstacle for a number of years, but in that time I have not found a better way around the problem of paying someone a heck of a lot of money to protect me from something that is really unlikely to happen. In terms of probability its like paying someone a full time salary just to walk around with me at the golf course on a Saturday morning and catch errant golf balls before they hit me. You really appreciate that one that they catch an inch from your noggin, but as weeks roll by without incident you can’t help feel that you are wasting your money.

As you can see I struggle with the whole concept of insurance. Recent events have renewed my enthusiasm to surmount the insurance dilemma.

For one thing we would save all or part of our $3000 insurance payment that we gift every year. That’s an extra $75,000 that we are missing out on in our retirement fund.

The other issue is that a significant sized city in the country that I live in has been badly affected by a major natural disaster. The result is that the main insurance companies have reviewed the cover that they are willing to provide to anyone living in other cities not affected by this disaster.

Let me explain. Our insurance is currently replacement insurance. This means that we pay the insurance company a fixed premium and they cover us by rebuilding a similar house for us if we ever needed one. The price escalation risk (i.e. that property construction costs might be higher than the premiums we pay) is carried by the insurance company.

But now the major insurance companies have been badly affected by escalation (suddenly everyone in the same large city wants a new house at the same time) and the price to rebuild has spiked sharply. Insurers have responded by passing this price escalation risk directly back to their clients (carrying none themselves) through a nasty change in their policies. As a result it appears that I will no longer be able to purchase a ‘replacement’ insurance and instead will have to settle for a ‘sum insured’ policy.

This is worrying. We need to consider how much we would actually need to rebuild our home. In the event that our city was affected by tsunami or earthquake the price of home rebuilds could go up 100-150% as builders and materials will be in short supply. The problem is that if we covered our selves for 150% of our home’s current value we would be paying insurance premiums that are way too high considering the actual value of our house and an over insured house is a motive for mischief..and here is the issue.

Insurance companies cannot allow people to over insure or the number of ‘accidental’ home flambe’s would increase sharply.  Although the costs of rebuilding after a major disaster could be double the price it would be unwise for an insurance company to allow this type of cover even if  their customers are willing to pay them inflated premiums.  Bottom line…no insurance company will sufficiently insure our family home against natural disaster, but because this is so very unlikely is it actually a problem (even though it just happened in the city next door)?

As I see it our options (in order of decreasing riskiness) are:

Don’t insure at all. Redirect the savings to grow my capital retirement fund faster.

Continue to pay $3000 per year and hope that in my lifetime we are never affected by major flooding, earthquakes or tsunami so our cover should be sufficient.

Battle with a company to let me pay them+$6000 per year so that we are covered for everything from possible to improbable.

Return to renting. Let the landlord sort it.

I have also considered ideas like form my own insurance co-op, but I still need to learn more before I could consider a co-op as a serious alternative. Coorperating on insurance isn’t as far fetched as you might think. It is just a question of scale, equity and stability.

Anyway, I still pay insurance. I don’t want to, but I pay it.  Still I frequently think that perhaps there is something I am missing? A beautiful, elegant solution that my pigeon brain has failed to uncover…

Dear readers I’d love to hear from you if you are an insurance dodger. Help me out!

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