People tell me all the time, “Insurance companies get rich at our expense.” While this may or may not be true, let's look at this in context and understand some basic insurance concepts.
The first concept is the concept of risk. "Risk" as defined by a financial advisor is the uncertainty of loss or gain. "Risk" as defined by a casualty underwriter is the potential for loss. Big difference in definition and concept.
Insurance companies are all about risk. How do we determine risk? How do we price risk? How do we avoid as much risk as possible? Etc... The insurance companies look to maximize their profits by pricing the risk correctly and assuming (taking on clients) the best risk they can.
The second concept to consider is how we deal with risk. As a consumer, there are three basic ways to approach risk: accept it, transfer it or avoid it. If you accept it you bear the financial responsibility of any losses. If you avoid it you avoid activities that could lead to a loss. If you transfer it, another party (insurance company) pays claims for any losses; and purchasing insurance is the most popular way to transfer risk.
Regardless, insurance is something everyone needs that no one wants to use. Because like I always tell people, when you use insurance something usually has gone wrong. It's not 'health insurance' - it's 'sick insurance.' It's not 'life insurance' - it's 'death insurance.' It's not 'yacht insurance' - it's 'my yacht was damaged or destroyed insurance.' It's not 'liability insurance' - it's 'I messed up and now someone is suing me insurance.'
So the overall concept of insurance is simple: you transfer risk by buying insurance, something goes wrong that is covered by the insurance you bought, the insurance company pays to indemnify you (make you whole). But... is insurance expensive or are people simply averse to the pricetag?
M? I think insurance is cheap, considering... Here is a very simple example to illustrate my point: if you own a $3million yacht and you pay $30,000 per year it would take you 100 years of paying premiums to equal the financial risk the insurer bears from day one. If someone offered you $30,000 but told you that you could be on the hook for $2.97 million, would you take the deal?
Now, couple proportionately low premiums that you pay with items for which the insurance company is immediately on the hook, like: legitimate losses, scams/fraud, charter endorsements, third-party liability in excess of the value of the hull, medical payments, employer liability, statutory coverage (Jones Act and USL&H), lagging investment portfolios, etc... and it’s easy to see that insurers bear a significantly greater proportion of financial risk (on the front end and back end) than you or I ever will.
And if you still think insurance companies are getting rich at our expense, perhaps they have to get rich in order to pay claims: Because while risk is uncertain, human nature is not. Insurance companies know this, and we pay for it. Truth be told, I WANT my insurance company to be rich because when I submit a claim I don't want my insurer to have to go begging for money - I want them to pay.
For more information on insurance concepts, contact CYA/Comprehensive Yacht Assurance at info@cyacht.net or 954.604.2888.
The first concept is the concept of risk. "Risk" as defined by a financial advisor is the uncertainty of loss or gain. "Risk" as defined by a casualty underwriter is the potential for loss. Big difference in definition and concept.
Insurance companies are all about risk. How do we determine risk? How do we price risk? How do we avoid as much risk as possible? Etc... The insurance companies look to maximize their profits by pricing the risk correctly and assuming (taking on clients) the best risk they can.
The second concept to consider is how we deal with risk. As a consumer, there are three basic ways to approach risk: accept it, transfer it or avoid it. If you accept it you bear the financial responsibility of any losses. If you avoid it you avoid activities that could lead to a loss. If you transfer it, another party (insurance company) pays claims for any losses; and purchasing insurance is the most popular way to transfer risk.
Regardless, insurance is something everyone needs that no one wants to use. Because like I always tell people, when you use insurance something usually has gone wrong. It's not 'health insurance' - it's 'sick insurance.' It's not 'life insurance' - it's 'death insurance.' It's not 'yacht insurance' - it's 'my yacht was damaged or destroyed insurance.' It's not 'liability insurance' - it's 'I messed up and now someone is suing me insurance.'
So the overall concept of insurance is simple: you transfer risk by buying insurance, something goes wrong that is covered by the insurance you bought, the insurance company pays to indemnify you (make you whole). But... is insurance expensive or are people simply averse to the pricetag?
M? I think insurance is cheap, considering... Here is a very simple example to illustrate my point: if you own a $3million yacht and you pay $30,000 per year it would take you 100 years of paying premiums to equal the financial risk the insurer bears from day one. If someone offered you $30,000 but told you that you could be on the hook for $2.97 million, would you take the deal?
Now, couple proportionately low premiums that you pay with items for which the insurance company is immediately on the hook, like: legitimate losses, scams/fraud, charter endorsements, third-party liability in excess of the value of the hull, medical payments, employer liability, statutory coverage (Jones Act and USL&H), lagging investment portfolios, etc... and it’s easy to see that insurers bear a significantly greater proportion of financial risk (on the front end and back end) than you or I ever will.
And if you still think insurance companies are getting rich at our expense, perhaps they have to get rich in order to pay claims: Because while risk is uncertain, human nature is not. Insurance companies know this, and we pay for it. Truth be told, I WANT my insurance company to be rich because when I submit a claim I don't want my insurer to have to go begging for money - I want them to pay.
For more information on insurance concepts, contact CYA/Comprehensive Yacht Assurance at info@cyacht.net or 954.604.2888.
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