Friday, 18 October 2013

Friday’s Five Minute Finance: If you can’t afford travel insurance…

…then you can’t afford to travel.

We’ve heard it all before, from seasoned travelers, or well-meaning parents, or those who have had to call on their insurance while abroad, but the underlying message of the above quote is true. If you think you can afford to travel to Africa or the USA without travel insurance, then that is a very big risk to wager. Much the same as buying into one of the biggest purchases of your life – your home – and then failing to protect that asset. So in the spirit of Friday’s Five Minute Finance, today I’m going to devote a little time to general insurance, with an emphasis on general insurance and you.

General Insurance is summed up by the Insurance Council of Australia as falling into six main categories, being Home and Contents Insurance, Motor Vehicle Insurance, Business Insurance, Mortgage Insurance, Workers Compensation and Travel Insurance. For now I’m going to focus on two of those areas – Home and Contents, and Mortgage Insurance.
So what is insurance? Insurance is “a general term for products offered to consumers to mitigate risk and provide financial compensation in the event of adverse unforeseen circumstances”. Think of the Victorian Bushfires, or the Queensland floods – two typical examples of natural disasters or force majeure that people tend to buy insurance for. And when I say buy insurance, that’s a retail term. Insurance brokers don’t sell insurance, they buy risk. They are using statistical analysis to determine the likelihood of an ‘unforeseen event’ happening to you, and then them having to pay you compensation. When the statistics are right, they make money out of the fact that collectively they will receive more money in premiums than insurance claims they pay out on. Until the ‘One in a 100 year flood’ or other similar natural disaster occurs – hence think home insurance or contents insurance. Then there is the risk mitigation insurance designed to protect financial entities bottom lines when they loan you money – think of mortgage insurance you buy when you take out a loan if you have less than 20% equity as a deposit.
The after effect of the 'mass casualty' type incident that hits insurers hard is that premiums invariably go up. This helps them but hinders you. Invariably it will be an across the board type application of the higher premium that you end up paying along with those affected by the risk event. Imagine our surprise (putting it mildly) when upon returning from two years in the USA, we ring up to re-quote our home and contents insurance (usually around $400 for $50,000 cover) and get a quote for $2,000! When I ask why, I am politely told it’s to do with the Queensland floods. Which as I indicate, was in South East Queensland, and I live in a non-flooding area in Townsville – go figure!!
Well, given that quote (which I was never going to pay), I said goodbye to 10 years of being a loyal consumer and rang one of the big banks, and got $40,000 of cover for around $700. Big difference for a few phone calls, but the important thing was ensuring that we had the same relative level of cover even though we had changed insurance providers. Funnily enough (well, not really when you are paying large sums of money) our home building insurance renewal arrived the following week (from the same insurer we had used for contents for 10 years) and it had gone up by approximately 25%... obvious thing to do is ring the aforementioned big bank we went with for our contents insurance and get a price beating quote… or not as it turned out. Their quote for building insurance came in at around $1,700 – why? Queensland floods. So we stuck with the 25% increase from our existing insurer and saved around a grand.
So why the big difference? When you deal with retail insurance providers you are dealing with the retail shop front – who don’t necessarily hold the risk they buy from you. Their risk books are on-sold to reinsurers, of which there are approximately four major reinsurers servicing Australia. The impact of 'mass casualty' type events is felt by these organisations, who pass the cost back on to consumers, as is shown in the following article by the Sydney Morning Herald earlier this year:
So what can we do to try and gain the best value for money in a product we all need, that is expensive to purchase, and that we hope we may never need to use? Here are a few tips to consider when it comes time for policy renewal, or if you think now is a good time to speak with your insurance broker and try to broker a better deal yourself…
  • Shop around; the ability to use telephone and online quotes makes the issue of comparing insurance premiums relatively easy.
  • Look for insurers that offer discounts for bundling or multiple policies.
  • If your needs are more complicated, speak with an insurance broker and ask them to do you a better deal. If they are the broker you have used for many years, ask them to give you a loyalty discount, lest you consider taking your business elsewhere.
  • Don’t be swayed by blind loyalty – with our car insurance we actually found we got a better deal with a new provider than we could with our existing provider, simply because they offered a new customer discount that our existing insurance company wouldn’t match.
  • Understand the fine print and what any potential exclusions are – if you decide to shop solo – remember you are doing the due diligence on definitions of coverage and what your policy actually covers you for.
Anyway that’s it for another Friday, next week I’ll be delving into Personal Insurance, and the intricate world of Life, Total & Permanent Disability, Trauma, Income Protection and Business Expense Insurance.

Ambrose Bierce (1842 – 1914)
Until then, Go you good thing!
Cheers, Col
P.S. Just want to say we are thinking of everyone down south with the bushfires and hoping everyone stays safe. Homes can be replaced, but lives cannot, so please take care.

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