Month: December 2017

I always ask new clients how involved they were in the design of their old insurance portfolio, and 99% of the time they something like, “I wasn’t.  The agent just told me what I should have and I bought it because they seemed really nice”.

I believe a better way is to be engaged in the design of your own insurance.  There’s very little subjectivity in how your insurance will perform after a loss, so the outcome of your future insurance claim begins the moment you decide on what to purchase.

I also believe that no one cares as much about your insurance meeting your expectations as you do, so your first priority is to find counsel from someone who can draw-out a detailing of your standards, expectations, attitudes, and tolerances.

I find that one useful tool is answering among the set of mutually-exclusive questions below.  It doesn’t replace a full insurance audit or inventory, but my clients say it’s a great way to start a discussion about what really matters to them in protecting their financial plans for the future.

How an insurance company determines your specific premium is a complex set of algorithms that only a few people at the insurance company even know the formula to.  Everything from credit, education, years since you last switched insurance companies, the highest liability limits you’ve selected in the recent past, whether you own a home, where you live (in addition to the cars you drive, and whether you’ve had tickets or claims) can all be factors.

But the general concept of how insurance premiums are calculated is pretty simple and it should give you some insight into how you can design your total risk-management plan to try and maximize your position when it comes to choosing among your insurance options.

Keep in mind that insurance is a contractual promise to finance your loss according to the policy contract you’ve designed and selected.  In exchange for that promise of future loss-funding, you and all your neighbors pay premiums in advance so there’s enough money in the hands of the insurance company to pay for individual losses, pay their administration costs, and pay their shareholders any profits.

It’s important to know that the biggest risk to an insurance company isn’t failing to predict the one rare huge loss, it’s failing to predict the frequency with which losses occur.  That’s why after you have a claim, your premiums go up – it isn’t to make their money back, it’s because the #1 predictor of a future loss is having a loss.  Nobody likes to hear that, but it’s math and a statistically-provable fact.

It also partly explains why there have been huge increases to auto premiums across the industry.  The rapid inclusion of in-car sensors, electronics, and driving aids has shot the cost of repairing even small bumper damage through the roof.  It’s not just that an individual car is now more expensive to repair, it’s the failure of the insurance companies to predict how quickly consumers adopted such features into their cars.  Now there are huge losses and deficiencies in premium across the board and insurance companies are trying to make-up for lost time.  We think that will continue.

On the other hand, losses with a very low probability of occurring, even if the consequence of such loss is high (like a very serious auto accident), is often manageable when the insurance company can calculate a longer-term likelihood of collecting enough premium before that kind of a loss occurs.  It’s why every additional million dollars of excess-liability insurance gets cheaper than the million that came before it.

So in the calculation of everyone’s insurance, there’s an innate bias against things that happen a lot.  Damage to your bumper, theft of jewelry, broken windows, and water damage to your home are common examples, and insuring against these losses is the most expensive insurance that you buy.  And while not enjoyable, none of those are probably going to be life-altering.

In contrast, if you were responsible for an auto accident that left someone seriously injured, or your dog bit a child, or you were responsible for a serious mistake made by your own child, having to pay to resolve that loss (and the probable lawsuit) could ruin your financial position.  And insuring against these losses is the least expensive insurance you buy relative to the benefit provided by the policy contract.

The benefit of knowing this is to create your expectations on how you want to allocate your insurance dollar.  In our opinion, the best use of your premium is to buy loss-funding for things you could never pay for yourself (lawsuits, serious injuries, etc), and the worst use of your premium is to buy loss-funding for things that happen a lot.  So we advocate setting a high priority on umbrella policies, life insurance, and disability insurance and using high deductibles to keep small and frequent claims away from the insurance company in exchange for lower premiums.

 

These are a few of my favorite things:

• Talking to our clients – truly the absolute best part of what we do is relate with people who keep us employed and busy.  We love caring for those who care for us.
• Learning – there’s always more to know and experience.
• Sharing – giving away all that we know so it can fill-in gaps of understanding to help people make important decisions.
• Getting out of the office and face-to-face with my clients.  Old school, but priceless to me.
• My stand-up desk.  A total life changer.
• Our company.  We’ve been here since the early 1950s, and John, Jim, and I have a combined experience of almost 100 years.  I care about them and their families and we’re lucky to be partners together.

We’ve always devoted ourselves to a reactive availability, consistency, and being aware of what matters to you.  And we’ve recommitted ourselves to proactively giving away more of our experience and the secrets of what we know.  As the rest of the industry pulls itself away from quality care and service, I believe we win if we do three things well:

1. Share our learned intelligence to inspire your good decisions.
2. Unburden your hassles of getting the right things done.
3. Stand up against motives that aren’t in your best interests.

Thank you for all you do for us, Merry Christmas, and Happy New Year!

photo: Rachael McGraw – Snoqualmie Pass, WA