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to insure or not to insure....


While these comments may well belong in the "DUH!" class, it is sometimes easy to forget exactly what it is you're trying to accomplish in buying insurance.

There are more than a few business people who could best be described as "Insurance happy."  These are the prospects insurance agents dream about.  Some buyers seek protection against every conceivable misfortune and seem to be willing to spend unlimited amounts of money.  If this is your problem, insurance may be the least of your concerns.

Others generally make good decisions, but sometimes without doing some simple math. Consider this for any property valued in total at less than $5,000 and with a useful life of 5-10 years or more: If the sum of the predicted five-year premium plus the deductible on an item exceeds the cost of replacing it, insurance is almost certainly not prudent. This is especially so in the new era, as technological advance and rapidly improving productivity in the manufacture of most equipment and structures may well motivate you to seek replacement anyway. This is due to the future likelihood that a functionally improved product may be available at lower cost. By self-funding your entire risk instead of handing premium to an insuror, you prepare the means for replacement following loss, or at a time when you schedule it.  (For items at high risk for fire, theft or other loss, there could certainly be numerous exceptions, however property at higher risk is likely to be equally costly to insure.) You are admittedly assuming some potent risk in the early years, but the potential benefit after five years normally would far outweigh it. Clearly, the expected useful life of your item must also be a factor, as well as the discipline to actually create funding.

Lastly, if you self-fund an insurance reserve using your own money, you don't have the inconvenience and general annoyance of documenting losses to some claims adjuster & hoping the fine print doesn't void your claim. You also reap the benefit of whatever interest the fund may earn and save the cost of insuror profit which would be built into your premium payment.

If your uninsured item happens to be stored with ten other items of value that are also self-insured, or it is subject to the coinsurance requirements in a larger policy, obviously the math no longer works.

This reasoning or variations of it are routinely applied by insurance buyers on a much larger scale, depending on their business size, operations, risk tolerance and the particular type of property at risk.

 

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