Personal Risk Management and Insurance

We often hear on commercials that “buying insurance is buying peace of mind” which gives the public an impression that insurance covers everything.Unfortunately it is not true. For example, property insurance usually has three types of policies. The most basic policy only covers fire, smoke, lightning, vehicle impact, certain water losses, wind/hail, vandalism and malicious act…etc. A broader policy may cover theft, transportation and electricity (power surge) on top of the risks listed above. A third type of policy is called All-Risks policy (most expensive one) but  its coverage is limited by  exclusions. So none of them covers everything.

Generally speaking, an insurance policy covers sudden and accidental losses.

The following examples may give you better understanding.

Water damage caused by pipe burst in non heating season is a sudden and accidental loss which is covered by a policy; but  a pinhole on the pipe resulted in repeated and continuous leakage is not an insurable risk.  Most of habitational insurance policies exclude resultant water damage due to repeated and continuous leakage. Normally heavy mold is an indication of long-term leakage.

For vehicles, collision, upset and theft are good examples of insurable risks; however “wear and tear” is not for sure.

Therefore, don’t be tricked by the commercials. You’d better REVIEW the policy being offered to make sure what coverage is included. If you dont’ understand wordings, ask your insurance agent to give you explanation.

Although no insurance policy covers everything, but major risks in our daily life are mostly covered. In terms of volume, majority of property claims are water damage (60%) like plumbing issues,  sink overflow, sewer back up, ice damming…etc. In some areas, wind and hail is a large risk. Theft occurs quite often in cities. In terms of severity, fire loss is at the very top. On auto side, collision would be a major risk. Theft happens a lot; however, sometimes, a stolen vehicle could be recovered by the police and then it ends up repair, towing and storage costs.

Buying insurance is not a normal purchase. It is a process of risk management. I used to work with  the leading global provider of risk management and insurance  brokerage. Most of large companies, organizations and municipality governments have risk managers. One of their jobs is determine:

• what risks are major and what risks are minor
• what risks should be transferred to insurance company by paying premium
• what risks should be retained (self insured) for better cost control

When it comes to personal insurance, the principle of risk management should be the same.  You need to think about risk retain, risk transfer and cost control.  How to do that….see post How to Save Premium

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