Insurance isn’t an overly esoteric field. Most of the laws, information, and practices can be readily understood, at least in principle. In many cases, though, it’s made to appear much more complicated than it needs to be. The more knowledge withheld from insurance buyers, the less able they are to make informed decisions. All of which benefits some industry professionals.
No matter what insurance you’re using, there’s a good chance that a better way to finance risks is out there. The financial costs of not knowing about it are almost certainly higher than the time it takes to learn some of the finer points covered in this article.
Commonly Overlooked or Misunderstood Concepts in Insurance
Insurers trying to be fair and transparent in their dealings are open about all the following points, but others might not be so forthcoming.
- You have more options than you might think – The UK has the largest insurance industry in Europe, and the fourth-largest in the world. With over 340 general insurers registered in the UK, there’s almost certainly a better insurer offering a better product than you’ve been led to believe. Finding the right company and product is the key to minimising IPT (insurance premium tax) – legally!
- If you haven’t considered self-insurance, it’s time you started – For many organisations, self-insurance is not only permitted, but it’s also one of the most desirable insurance alternatives available, depending on the type of liability. Self-insurance is a great way to avoid insurance premiums altogether. Captive insurance isn’t necessary for many scenarios. In fact, captive management often unnecessarily complicates matters for organisations eligible (or able to) to self-insure at high levels.
- Underwriters aren’t setting premiums – It’s a widespread misconception that underwriters decide premium pricing. In fact, it’s determined by actuaries based on claim frequency, claim severity, and average claim cost of similar products. Underwriters decide which client falls under which category of pricing.
- Read the Solvency and Financial Condition Report (SFCR) – The Solvency II Directive obligates insurers to publish all their policyholder-facing documents, from 2016.Insurance buyers are well-advised to go through these before choosing an insurer. Some companies also come up with a policyholder’s overview of solvency, which is an introductory document to the dull SFCR and provides most of the relevant information in an easily-digestible format.
Not Knowing Can Be Expensive
Obviously, there are numerous interests from insurance companies, brokers, and other parties to keep some avenues unexplored as not generating any revenue for them. Therefore, the onus is on you, the buyer, to explore all possible avenues that could benefit you.
Total cost of risk (TCOR) is another way that mildly obfuscates the basic information necessary to make good decisions as a buyer. All these can lead to increased insurance costs, becoming over- or under-insured, and trusting a company with poor financial practices.
Instead, try to take a holistic risk assessment approach that takes into account your risk profile, what’s being insured, why the insurance is needed and who the best candidates are to insure it.
The Right Fit
As the aphorism goes, knowledge is power. And it’s certainly true, in the case of insurance that knowledge equates to better financial choices. Before committing to any insurance company or product make sure you understand, not only what your insurance needs are and everything about the provider, but also what the alternatives were and their cost/benefits/risks/rewards were in your specific situation, from an unbiased advisor.
Author’s Bio: John is an actuary and owner and Director of HJC Actuarial, which he founded in 2003 and which has advised over 100 clients since it’s’ inception. He has worked in the insurance industry for 30 years, qualifying as an actuary in 1995 and becoming a Partner in a major global consulting firm in 2000. Since 2003 he has provided independent advice to his clients on optimal insurance program design, presentation of risks, and premium negotiation with insurers, insurer solvency assessments, policy wordings, insurer selection, and insurance broker selection.