Reducing risk with insurance

Ruapehu Bulletin, Volume 6, Issue 294, 11 July 1989, Page 4 (Supplement)

Reducing risk with insurance

Insurance is a means of reducing risk. If we don't insure our home, car or other property we are accepting the total risk of loss if our property is damaged, destroyed or stolen.

Insurance is a contract of indemnity, that is, protection against loss. Insurance is not a way of making money but should restore the claimant to the position they were in before they suffered the loss. In practice the monetary value of what was lost, which is what the insurance company will pay, may not be sufficient to replace what was lost for all sorts of reasons. This can apply to replacing a vehicle, written off after a accident. Insurance is essentially a means of sharing a risk. Premiums are paid into a pool from which claims are met. The lower the claims the lower the premiums. Fraudulent or inflated claims put up the cost of insurance for the rest of us. Do not over-insure as insurance companies will only pay out the market value (or assessed) value, not the value for which something is insured. If house and contents policies are inflation adjusted check that the values are realistic,

otherwise you may find you are paying more than you need. The same applies to car insurance. When you renew the policy check that the insured value is in line with market values. Under insurance means that you are carrying part of the risk. In the event of a claim the insurance company will pay out in proportion to your cover. It is particularly important to insure buildings for their replacement cost otherwise the consequences of a fire could be disastrous financially. In any policy the exclusion clauses should be read carefully to make sure that the cover you want is not excluded under the policy. In a contents policy valuable items should be listed separately as 'specified items' and their value shown. This will cost a bit extra but will mean that you are fully covered for their value which may not otherwise be the case. Many policies today Turnpage 5

Insurance

carry an 'excess' clause which means that the policyholder carries part of the risk. The insured person will not be paid the first $50, $100 or more of any claim. This has the effect of reducing the number of small claims and also lowers the premium. Third party insurance can be important. The classic story is told of a young enthusiastic student driving his uninsured Mini who lost control of his car, side swiped a BMW coming the other way and then collided with a power pole carrying a transformer. The BMW, swerving to avoid the collision, ran into a brick wall. After being convicted on various charges the hapless student found himself facing claims for damage totalling $260,000.