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Considering Self-Insurance

Updated on May 24, 2022


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. 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. Deposit 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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