Some common phrases I hear when talking to clients.
1) That wont happen to me.
2) I never make claims.
3) I pay so much premium and get nothing back.
While I understand the source of questioning and frustration trying to manage risk there are a few steps you can take to be your own risk manager.
What is risk? :
First risk in insurance (typically) is the possibility of a negative outcome, or no loss. This is known as pure risk. For example your house burns, and you have a financial loss or it doesn’t burn and your financial gain is zero. You cannot not gain profit from insurance. This is important to note as most people think of risk as either gaining or losing money, as is with the financial risk a home’s market value has of the value going up or down.
Ask yourself how do you measure the risk you face from owning a car, a home, a boat?
There are two methods to figure this out. The first is subjective risk, where one perceives the amount of risk based on an individual’s opinion and experience. The second is objective risk that is measurable variation on uncertain outcomes based on facts and data. Most individuals use subjective risk to say measure the risk of an auto accident. That’s were common phrase, it won’t happen to me, or I never make claims. Based on their experience, they are right however, it’s easy to see this isn’t an accurate way of judging one’s risk. To top it off study after study shows that people almost always guess wrong at the risk, and by large margins. You might know a teenager with an out of control subjective risk, but we continue some of those habits into adulthood especially measuring catastrophic risk.
Now, contrast that to most businesses use objective risk to manage their risk. They use tools and data to judge and manage risk. Would you invest in a company that didn’t use objective risk management?
What you get back, even if you don’t make claims:
Insurance is an unfamiliar product, you spend lots of money and if nothing happens you have nothing to show for it. I could get into why that is and how it works, but I would rather cover what you are still getting! The benefit is residual certainty, or the benefit of not worrying about unforeseen property or liability losses. Without the certainty of transferring the risk, banks would not loan money, teenager’s parents might not let them drive, landlords wouldn’t buy and rent property and the list goes on… but it allows organizations and individuals to pursue a variety of risky activities that offer substantial rewards, to themselves and society.