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INSURANCE RISK MANAGEMENT – PART 1

This is the first in a series of articles on the important role Risk Management plays in insurance.

Let’s take a trip down the insurance memory lane. In the beginning, insurance was invented to spread the financial risks of an event which could cause severe loss or damage. Ships sinking and the Great Fire of London are some of the earliest recorded examples of the need for humans to spread catastrophic losses into risk pooling arrangements. Insurance has evolved to cater for a variety of risks, some of them very complex and some very minor risks. At source, insurance was not designed to cover small attritional losses, but rather the less frequent major, catastrophic losses (e.g. Fires, Floods, Earthquakes – sometimes called acts of God)

The premium insurers charge and the terms they impose for the risk they accept is essentially based on the risk profile of the client – modern insurers have access to vast amounts of data to assist them in determining a client’s risk profile, the primary ones being the frequency of claims and financial impact of these claims. So, in essence, if a policyholder claims more than the average person, the insurer will be forced to increase the premium in order to be profitable. Conversely, if a policyholder claims less than the average person, premiums are likely to only increase in line with the cost of living.

It is clear that you should protect and enhance your risk profile, in order to remain an attractive risk to insurers and of course ultimately, to keep your insurance premiums down and your terms favourable.

The obvious question arises, how does one practically claim less, in order to protect their risk profile. The answer is, by managing the risks you have identified and chosen to insure, mainly using the risk prevention approach. The old adage that prevention is better than cure, is so true in terms of managing your insurance risk. Focus on what steps you can proactively take to avoid claiming. Macro examples include, preventative maintenance, changing vehicle driving behaviour, improving home and vehicle security (beyond what your insurer requires) and, in the event of a loss, making a conscious decision to protect your risk profile, by only claiming for things you can’t afford to replace.

Put another way, see this approach as a proactive form of self-insurance. Self-insurance is a practice that is used by all Insurers, by way of compulsory excesses, which are imposed as a standard in the policy contract. This forced form of self-insurance helps by reducing the insurer’s administration by alleviating small claims and ultimately, enables them to improve the premiums they charge. We recommend you protect your risk profile, by practicing self-insurance as far as possible (beyond the policy excess).

In closing, AIB Cape understands that no client likes claiming. After all, the claim process takes up valuable amounts of your time, it is inconvenient and often stressful for you. Moreover, sometimes your insurer can replace an asset, but they can’t replace the sentimental value that asset may have for you. All the more reason to avoid the claim in the first place, by practising proactive risk management.

As always, AIB Cape remains at your service.

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May 28, 2019

Posted In: Newsletters

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