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The-facts-about-insurance-part-2

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The facts about insurance — part 2:
addressing common misperceptions
Bruce Palmer
3/18/2015
In the December 2014 issue of OMR, Insurance Update addressed some common misunderstandings and inaccurate statements with respect to the OMA Insurance program. This month, we continue our look at some of the misperceptions and sentiments typically associated with insurance, and provide a fresh perspective on how insurance works, and why.
​​​​​ “So I need to make a claim — Isn’t that what insurance is for?”

Insurance is a contract of indemnity, which means that it is intended to return you to the same economic situation that you were in immediately prior to the occurrence of a “fortuitous event” — i.e., one that happens by chance rather than intention. In essence, insurance is designed to protect you, or “indemnify” you, from sudden financial losses caused by an event you did not expect, and could not have prevented. 
If, however, an event is considered to be predictable — or becomes predictable — and a policy is already in place, then you can expect an insurer to try and change or terminate the insurance contract, subject to its terms, and the premiums may increase, as illustrated in the following examples: 

I once had a client whose car was constantly being broken into while parked in the same spot overnight. The thieves would break a window and steal whatever was in the car. After the third time this occurred, the insurance company increased the man’s deductible and removed glass coverage from his vehicle. My client was furious. “Why are they doing this?” he complained. Yes, he had made three claims in five weeks, “But isn’t this what insurance is for?” Well, not exactly. After the second break-in, it became “predictable” that his car was going to be broken into if he kept parking it in the same spot, yet he deliberately chose to continue parking there. Windows are expensive, and while insurance claims for break-ins did not affect his premium, every broken window was quickly eating up far more than my client was paying in premiums. In fact, after the first claim, the costs of the additional claims were being paid for by all the other policyholders insured by this insurance company. So it’s important to remember that insurance is for the unexpected events, not the expected ones.

 Similarly, I have had clients who really want to purchase travel insurance whenever they are traveling against their physician’s advice, or while they are medically unstable. I understand why they may want to travel: for some, it’s a long-planned trip that might truly be their last chance to travel with family; for others, getting away is important for stress relief and recovery from personal ailments. Whatever the reason, invariably, many either cannot obtain travel insurance or have restrictions placed on their coverage. Again, the question “Isn’t this what insurance is for?” is often asked. What these clients may not realize is that people who travel against medical advice, or while medically unstable, will have a dramatically increased probability of requiring medical attention while away from home, thus putting them at greater risk. Insurers are not going to give these clients the premium and coverage that has been created for normal-risk clients. This does not mean that higher-risk clients cannot travel, it just means that an insurance company does not want to assume the financial responsibility for the very probable outcome of these particular clients’ actions.​

​​​​​ “I deserve something back because I have paid premiums for so long and never had a claim.”​

This is another comment that I often hear from clients, and to appreciate why it’s a misperception requires an understanding of how insurance works for both the insurance provider and the policyholder. 
 
For the policyholder, having insurance makes sense because we simply do not always know when something bad is going to happen. For instance, hypothetically, if we knew in advance the exact day we might suddenly become disabled, and that day was far enough into the future, we could simply save money in a bank account rather than pay for disability insurance. But since we don’t know if, or when, something like that might occur, spending a nominal amount on a disability insurance policy (usually just pennies on the dollar each year) is a rational alternative to waking up every morning with the risk that you and your family could be facing financial ruin before nightfall. 

Yet, paying money for something that may never be needed leads some policyholders to believe that they are either wasting their money, or “deserve something back” if they don’t make any claims over a number of years. To understand why this isn’t so requires an understanding of how an insurance provider operates.​

The work of insurance providers is not magic. They have 100 cents to every dollar just like everyone else, and they have no source of income other than premiums and the investment income generated by those premiums over the years. If, for example, an insurer pays out 75% of its premiums in claims (and this is not an unusual figure), then it is collecting $1.33 for every $1 it pays out, plus it’s bringing in revenue from the investment income.​​
 

If you keep in mind that insurance is fundamentally about managing risk, not building wealth, then you will never be disappointed.​

 

The simple truth is that most policyholders will pay much more into their insurance plans than they will ever receive back through making claims. The only reason insurance works is precisely because the premiums of the many pay for the losses of the few. If suddenly it were to become “the many” having claims then there would be no economic sense in using insurance to cover the loss. 

With auto and property insurance, for example, a person could buy $2 million liability coverage for less than $1,500 per year. Besides collision coverage for their car, this $2 million policy potentially provides: 

• Up to $2 million in coverage for liability in damage done to others in an accident; 

• Plus legal costs to be defended in court or avoid the costs of going to court; 

• Plus medical expenses if the driver gets injured in an accident; • Plus lost income, and other ancillary financial losses due to an accident; 

• Plus medical coverage and lost income coverage for all the passengers in the car, any pedestrians that were hit, and any occupants of any other vehicle involved in the accident; 

• Plus medical coverage for when​ the policyholder is a passenger in the car, or a pedestrian or a cyclist involved in an accident that involves a motor vehicle. 

Over the course of a typical driving life (age 16 to 76), this means a person may very well pay up to $300,000 in total for the above auto insurance coverage, and never — hopefully — need to make a single claim.

But for a few people who in fact do become victims of auto accidents and will need the above coverage, it is not hard for those policyholders to incur expenses well over $300,000. Indeed, for those very few people who need the full $2 million in liability coverage, plus court costs, plus medical expenses, they will never actually pay enough money through their insurance premiums to cover such costs. This means that their insurance company has to use premiums from all the other policyholders to cover it. 

Protecting the policyholder with the benefit of peace of mind, while keeping the insurance provider viable is how the system was intended to work in the first place, and that financial coexistence is just as vital today. 

So while you may not “deserve something back” just because you’ve never had a claim, the security of knowing that the premiums of all policyholders protects each one from unexpected loss is a huge benefit, and the reason why insurance is essential in today’s fast-moving world.

Add to this the tax-advantaged investment growth inside some insurance products, the protection from having your creditors or litigators seize your insurance money, the discipline of letting professionals handle the investments, and the knowledge that you have full protection from day one, and insurance makes a great deal of sense. 
 
If you keep in mind that insurance is fundamentally about managing risk, not building wealth, then you will never be disappointed.
 
​​​​​ “All insurers are the same: insurance is just a commodity.”​

I have to admit that sometimes the insurance industry tries to convince you that insurance providers really are “all the same,” selling themselves as nothing more than the cheapest available coverage. However, I have worked for insurance companies, agents and brokers, and as a consultant to the industry, and I know that not all insurance companies are the same, and that not all insurance is the same. 
 
Companies are indeed very different, and the approaches they take to serving you — from their perspective on pricing and risk selection to the way they look after you at claim time — vary a great deal. 

No company is perfect, but the very best insurers select customers they are good at serving, which is why it is advantageous to have a great provider like OMA Insurance on your side when dealing with a company. 

Practically speaking, there is a big difference between experiencing a large property insurance loss with a great insurance company, and experiencing the same loss with a company that isn’t so great. For example, while there may be no noticeable difference in service and outcome between two providers if your claim is for a broken windshield, there can be an enormous difference when settling a disability claim. In the latter instance, it’s important to deal with an insurance provider who understands physicians and their strong work ethic — like the great providers available through OMA Insurance. 

Moreover, rather than treating each disability claim as a potential fraud case, OMA Insurance develops a close relationship with our providers to ensure our members do not have to worry about their finances while they are worrying about getting back to work.​ 
 
​​​​​ “Insurance is strange.”​​
​ OK, I actually agree with this sentiment. Insurance is rather “strange” — or at least that’s how it seems at times. 

As a consumer of insurance, you are paying a fixed price today for an unknown event, of unknown duration, unknown magnitude, and unknown consequences, that may or may not happen at some point in the future. 

For every kind of insurance but life insurance, you are really hoping that you are pre-funding an event that never happens. And for life insurance, you know the payout will not happen during your lifetime. In fact, a good number of you will never have the opportunity to find out how good or bad your insurer is doing at handling claims, and for those of you who do, you will find out too late for the information to influence your original policy purchase decision. 

Perhaps the “strangeness” of insurance is precisely why it is so wise not to deal with strangers when arranging for coverage. 

Nobody can tell you what conditions are going to be like in 30 years should you finally experience a short-term disability. You never know for certain who will ultimately have to deal with your estate once you’re gone. You don’t know for sure if that car behind you is going to stop for that same red light you just stopped for. Even increasingly advanced forecasting cannot predict which weather “event” is likely to affect your home. 

When claims happen, knowing who will be there beside you matters. Knowing that they know about you counts. Having the peace of mind that there is an entire team of dedicated professionals working for you is important — it may even mean the difference between great, and not so great, protection for you and your family.

OMA Insurance: Not for Profit, All for Doctors.​