Considering Self-Insurance

Introduction

You have paid insurance on
your home for twenty years.
You have never made a claim.

Suddenly there's a disaster,
your house is substantially
damaged.

You call your agent.

Eventually he arrives,
maybe with a loss adjuster,
and after examination you learn that although you have suffered 1.2 Million dollars worth
of damage, you are only going to receive $764,000.

Terms like 'under-insured', 'excess', 'average clause' are bandied about, All you know
is that you have paid your premiums for twenty years, that what you have paid is equal
to your damage, but you are not going to get enough to cover your loss.

You are directed to your policy and in tiny go blind type is a convoluted sentence which
is deciphered to read that the Insurers will never ever pay your full loss.

But you are far luckier than those in New Orleans who were covered for hurricanes but
alas, not floods. And of course, Katrina wasn't a hurricane, it was a flood.


Understanding Insurer Menatlity

There are those who take a policy of Insurance, pay three premiums, suffer
damage, and recover a substantial amount, far more than they have paid.

That is the minority.
The extreme minority.

The majority have paid for years, never made a claim, and never recover
their full damage when they do.

To be coarse, Insurance Companies are  lucrative enterprises because
unlike Banks which have to return your money with interest, Insurance
companies never return your money, although they invest it at interest.

Although one might believe that Insurance Companies hold your money
in safe places so should always have enough to pay their clients, the
truth is, they very often can't pay when there is a major disaster.

Yes, a one off can usually gain most of the value. If there is a fire and
only your property is damaged, you might, (emphasis on might) receive
the amount you insured for.

But when there is a major disaster, such as hurricane, very few people
get what they think they paid for.

In Jamaica, for example, it wasn't until 1988 and Hurricane Gilbert did
people realise that although they had paid their premiums for years
they were not going to be recompensed for the true value.

This was due to the 'average' clause and other such tools which
meant that if you got $35,000 for $50,000 worth of damage you were
fortunate.

Understanding Risk

If you insure your home for $150,000 against flooding and your house is
flooded, it is likely that you will receive a substantial portion of that sum.

If you have insured your home for over twenty years and have never
made a claim, all that money is gone.

Although the Insurers can claim that "They stood a risk for twenty years!"
the fact nothing happened is not factored into the equation.

Your money is gone.

If you, however, had banked those premiums over twenty years, you
would have earned interest and have enough money to repair your
home.

Further, having a nice sum in the bank to act as collateral enables
you to take loans.

It is a gamble, yes, for you have to hope that there won't be a disaster
until you have saved a substantial amount of money. But the benefit
is that if there is a disaster, not only will you be compensated by a
simple withdrawal or taking a loan to the value of your deposit, but
this is Immediate. 

Unlike having to wait until the assessor arrives, until the report is
completed, until the Insurance Company gets around to writing
that cheque, you walk into the bank and there's your money


How To Self Insure

Invite various insurance companies to visit your property, make their evaluations, and set their premiums. The adjuster is pretty accurate and often has good advice.

However, you are taking no policy.
You are simply getting a free valuation.
You are getting a free schedule of payments.
For you are going to bank the premiums.

Find a nice bank or other safe financial institution, especially those which offer good long term interest. Make it mandatory that you pay your 'premiums' into the account on time as if it is an insurance policy.

Never touch those premiums. Never treat the account as a bank account.
It isn't.
It is an Insurance policy.

Every year go through the same sequence of having Insurance agents assess the value of your property and set premiums. Pay those increased premiums. If you have to hypnotise yourself into believing you can not touch that money, do so, because you can not touch that money.

At some point, if you are diligent, and there has been no 'claim' the sums in the 'insurance account' will reach the value of your house.

Further, considering you've been getting interest, you have deposited X and have X+
unlike Home Insurance where you deposit X and at the end of the year have 0.

This is why so many people in the Caribbean self insure.
They've learned their lesson.


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Comments 7 comments

Insurance person 6 years ago

You are stupid , what if risk happen in the first year


qeyler profile image

qeyler 6 years ago Author

If you were capable of reading, you would have noted the last paragraph in 'understanding risk';

It is a gamble, yes, for you have to hope that there won't be a disaster until you have saved a substantial amount of money. But the benefit is that if there is a disaster, not only will you be paid immediately by a simple withdrawal or taking a loan to the value of your deposit.

In countries like Jamaica which are hit by hurricanes and earthquakes many people now self-insure. They do so because they have already experienced NOT being PAID by Insurance companies.

In America, those in New Orleans WERE NOT PAID because although they thought they were fully insured, the Insurance companies, due to the magnitude of the damage decided that the damage was 'Flood' only and that was not covered by Hurricane.

This is not an invented article. This is not hypothesis nor speculation.

Persons who ceased insuring with companies in 1988 but self insured were FULLY COMPENSATED WITH EXTRA when suffering damage in the 1995 Earthquake, the 2004 Hurricane, the 2007 Hurricane and the 2008 floods.

Your house is valued at 8M. You have to pay premiums of 200k per annum. You have 1.4 M savings (at the time our interest rate was 17%) Do the Math. The earthquake was mild. Say you had 100k damage. You have the money now.

Insurance companies would claim your house was valued at 8.5M and you were underinsured, (this is a real case and real numbers)so does not pay you 100k but 90k. You have paid 1.4M and now have to find 10k.


Insurance person  6 years ago

Firstly , I am very sorry for saying that you are stupid

Secondly , I am concurrent with you that It is a gamble

Please read the below text to clarify ( Self-insured Against catastrophic risks )

Self insurance is a risk management method in which a calculated amount of money is set aside to compensate for the potential future loss.

If self insurance is approached as a serious risk management technique, money is set aside using actuarial and insurance information and the law of large numbers so that the amount set aside (similar to an insurance premium) is enough to cover the future uncertain loss.

Self insurance is possible for any insurable risk, meaning a risk that is predictable and measurable enough in the aggregate to be able to estimate the amount that needs to be set aside to pay for future uncertain losses. For a risk to be insurable, it must represent a future, uncertain event over which the insured has no control. Other characteristics which assist in making a risk self-insurable include the ability to price or rate the risk. If the insurable event is one in a large number of similar risks, the aggregate risk can be estimated according to the law of large numbers and the probability of that event occurring in the future can be quantified.

Normally, catastrophic risks are not self-insured as they are highly ( unpredictable and high in loss-value ).

Catastrophic risks are normally underwritten by the re-insurance or wholesale insurance market

Best regards


qeyler profile image

qeyler 6 years ago Author

We are on the same page. We are taking hurricane, earthquake and food. We are talking catastrophic damage...(I didn't use the term, assuming Hurricane carried that definition). Further, when there are 100k persons and 10k suffer damage, it is not unexpected that the insurers will pay. When there are 100k persons and 94k suffer damage...even 70k, they are not going to be fully compensated.

Hence in Jamaica, and other places which are prone to catastrophic disaster the statement you made..

---

Normally, catastrophic risks are not self-insured as they are highly ( unpredictable and high in loss-value ).

---

is turned upside down, as in Jamaica these are the ones that are self insured where fire, burglary, assorted other incidents will be insured for so that one might self insure the house, but have contents separately insured.

It depends on where you live, probably, what you insure for and how you are treated by Insurance companies.


Sullen91 profile image

Sullen91 4 years ago from Mid-Atlantic Region, US

I agree 100% with your appraisal of the situation, no pun intended. I'm curious how/why you don't apply the same line of reasoning to retail banking -- and I only mention this because you seem to draw a distinciton between the insurance companies and the banks. And the ostensible basis for this distinction so laughable that I don't know if you're being facetious or serious. I'm interested in more of what you have to say if you really meant what you said in that part.

Otherwise, I think this is a good hub and a worthy assay of the basic forces that drive huge industries such as insurance. "Insurance" against what? This sure isn't the kind where someone finds it in their heart to help you get back to normal after trial and misfortune. That would fit neither the true concept of insurance (as a guarantee that is actually "guaranteed"), nor the profit making business calling for everyone to give a tithe that they will be spared from calamity under the greater protection of a higher force. Oh yeah, nationwide is on your side! ;)


qeyler profile image

qeyler 4 years ago Author

Depends on where you are in the world. For example, in my jurisdiction, each Bank Account you have is insured for up to 600k. Hence even if the bank fails, you get back your money up to 600k.

Hence you scatter your accounts so that your money is protected.

Investing in Ponzi schemes, regardless of that they wish to call themselves is a non-insurable risk.


Ibere 23 months ago

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