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By Russell C. Janecka

 

It's All A Matter Of Risk                 See Other Articles

Methods you can use to manage your risk. 

Much as I hate to admit it, many people can't stand insurance. They think of it about like they do their taxes. A necessary evil. This probably stems from the perception that, having been told to buy it by their bank, insureds resentfully pay premiums year after year without seeming to receive anything for it, because they haven't made a claim. Well, I would like to change that perspective if I can. Allow me to explain.   Each day, each hour that the policy is in force, the insured is receiving the protection provided by the insurance company in exchange for the premium. At any time a hazard could produce a loss, be it a storm, fire, lightning or in the case of a car, a collision or theft. If it does happen, the insured can be indemnified by the policy. This means that he is put back in the relative financial position he or she was in before the loss occurred. That is why standard insurance contracts are referred to as indemnity contracts. But if the loss occurred in the absence of insurance, the cost of the loss could be devastating.   So, even though an insured may have not suffered a loss, he has received value for his paid premiums. This is the contractual promise or obligation of the insurance company.   In basic terms, insurance is a device for handling risk. It is a pooling of risk for those who have similar situations. Insurance can be defined as "the substitution of a small certain loss in exchange for avoidance of a large, uncertain loss." The small certain loss is the money, or "premium," paid for the protection. The larger uncertain loss is that against which protection is extended; the potential catastrophe. Some have erroneously considered insurance to be gambling. In fact it is the exact opposite of gambling. Gambling creates risk; insurance eliminates or reduces risk.   We are faced with all kinds of risk, and there are several ways to handle risk. Buying insurance is just one of them. I will use the T.R.A.P. method to describe how you can control or "trap" risk. The first method of handling risk is to "Transfer" that risk to an insurance company in exchange for premium. As described above, insurance passes the uncertainty of loss to an insurance company. R stands for "Retain" or keep the risk. In some situations you can't or wouldn't wish to insure risk, such as the risk that your home computer's hard drive might crash. This also includes ideas like raising your deductible to save money; or deciding to cancel Comprehensive and Collision coverage on your eight year old car because you could afford the loss and aren't worried about replacing the vehicle. You'll absorb the loss if an accident is your fault, but save the premium in the mean time.   Next is "Avoid" the risk. This option entertains the idea of simply selling that hot rod and getting a slower and less expensive car. Or deciding to not allow a son or daughter to obtain their driving license until they are 18 years of age.   Finally, you could "Protect" against the risk. You can put a motion detector activated light over the rear porch steps. Install a safe for valuables or guns, or add dead bolts and other security or alarm devices to improve your security. Stop smoking to improve your health insurability falls into this category and saves you money as well.   Most of us are continually, and yet unconsciously, making decisions in all of the above areas on a regular basis. We have our car insured and yet we lock it when leaving it in a parking lot. A person with a pool in their backyard can have liability insurance for the premises and yet lock the gate and not allow neighbors to swim in it unless the homeowners are present to watch over things.   It would be great if all insureds had a thorough understanding of their insurance. But how realistic is it for busy people to curl up with an insurance policy...and stay awake?   Even with the so-called "easy to read" policies, is it realistic to expect today's time-pressed consumer to wade through all that fine print? Easy to read does not necessarily mean easy to understand. My suggestion is to at least review the definitions section in your policies. These key words are explained giving you some idea of the most relevant and important terms which might lead you to understand the conditions and limitations of your policy. Even if it doesn't make you appreciate your insurance more, it will benefit you to become more educated about it.   Another point to consider: The use of insurance and bonds to eliminate uncertainty is one of the vital factors in the American economy. Our society, as we know it, could not exist without insurance. Credit could not be given. Vast building projects could not exist without insurance. The alternative would be to scrap the free enterprise system.   If all that technical discussion didn't increase your appreciation of insurance. Consider the idea given by Randall Stevens, an agent in Laurens, SC who advised that insurance and the agent are, "(like a) lifeboat or a life preserver. If that worst case (scenario) never happens we're just dead weight. Like a life boat on a passenger liner we go along for the ride and often get ignored. We're just an object in the way; something that the "productive" members of the crew have to work around. So, we're generally no good to anyone until something bad happens. Then that life boat starts looking good." Indeed, it suddenly becomes the most important thing on the boat. Russell Janecka is a Certified Insurance Counselor. He is the owner of Janecka Insurance Agency in Victoria, and serves on the board of directors with Germania Insurance Companies. (361) 573-4475