Wednesday, September 19, 2007

Insure against big losses

You should buy insurance against a big loss with a small chance of occurence. Look at these two cases:

Case 1:
Potential loss is $100,000. Chance of occurence is 1%. Expected cost of claim is $1,000. Premium (allowing for expense and profit margin) is $1,500.

Case 2:
Potential loss is $2,000. Chance of occurence is 50%. Expected cost of claim is $1,000. Premium (allowing for expense and profit margin) is $1,500.

Analysis:

For case 1, you cannot afford to bear a loss of $100,000. So, it is worthwhile to pay a premium of $1,500 to cover this risk.

For case 2, you can afford a loss of $2,000. It is not worthwhile for you to pay a premium of $1,500 to cover this risk, as you have to pay $500 more than the expected cost of claim (of $1,000).

It is not necessary to take insurance against small losses. It is better to bear this risk on your own.

An example is the deductible under a Shield plan. It is not necessary for you to buy insurance for this deductible, as you can take this risk on your own (or pay out of Medisave savings).
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3 comments:

Anonymous said...

To insurance agents everything must be insured. There is no such thing as weighing between the necessary and non necessary or such thing as self insurance.As long as there is an opportunity to make a sale client will be told that he or she needs insurance.They won't assess the circumstances surrounding the situation.
I am very wary of insurance agents. I only look for advisers from from FA companies. If I tell the companies what kind of adviser I want they would assign me one with the right qualification. I am not saying they are definitely good but at least I know that they know their work. But with insurance agent they just want to sell me something and anything.

September 19, 2007 12:54 PM
Thomas Phua's Blog said...

It is quite obvious you are selling your own medicine.

Don't condemn the insurance agent by singing praises of FA advisers.

For your info, majority of the Agents that left during Mr Tan's tenure as CEO is now with the FA Firm.

September 20, 2007 5:02 PM
Anonymous said...

It is quite obvious that FAs can sell better and quality medicine because they have access to better medicine of many companies instead of having to sell only one company's medicine, good or bad.
I believe this is also the reason why many agents from Income joined FAs and not another insurer.
Perhaps, another reason, a laudable reason, is they want to serve the customers better because they have the interest of their clients at heart.
I have seen the likes of insurance agents ;they sell lot stocks and barrels disregarding the interest of the clients.They lack principle
and ethics.

September 20, 2007 8:04 PM

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