Monday, January 07, 2008

Insuring a risk

If you face a risk with possible losses ranging from $0 to $10,000 and an expected loss of $500, will you pay $700 to insure the risk?

The answer should be "yes". Although the expected loss is $500, the actual loss can be as high as $10,000.

The difference of $200 (about 30% of $700) represents the cost of providing the insurance protection. It goes to cover the marketing, underwriting and claim processing cost of the insurance company. An expense margin of 30% is fair, in the case of an insurance contract that provide indemnity for losses. For a competitively priced insurance, the ratio of losses to premiums should be around 70%.

In the case of a life insurance contract that accumulate savings for the future, the expense ratio should be much lower, say from 5% to 10%.
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3 comments:

Khiat Han Hwee Adrian said...

To any layperson on the street, he may not know if the risk premium is worth $500, $700 or $1,000.

It is just like a vacuum cleaner that can be worth $100, $200 or even $1,000.

January 09, 2008 12:01 AM
Anonymous said...

The salesman is key to the transaction. It is at his mercy. He can either be #1.
honest and competent or #2.dishonest and competent or #3.honest and incompetent or #4.dishonest and incompetent. Very few insurance agents fall into the first category. 90%fall into one of the other categories.
All customers are clueless. They need help but in the last 30 years the help from insurance agents is help them to buy useless products
and products with high commission.
Can the insurance agents out there tell me why the men in the street are still under insured if they had done a good job.How come about 80%
of the CPF members lost their life saving?
It seems the insurasnce agents will do their best to give the least info, give half truth, distort, use meaningless words like rainy and sunny day, but to max their own commission. This answers why under protection and loss in the clients' investment.

January 09, 2008 10:12 AM
Anonymous said...

Is anonymous clueless abt insurance.Don't he read at all abt insurance from newspapers,magazines, internet etc. Doesnt he has friends who are Insurance agents whom he can trust. Does he really believe that all insurance agents do is to "max their own commissions". He appears to accuse insurance agent as conmen so much so that he is not covered with insurance. Good luck to him. If one day he is stricken with a dread disease and unable to earn an income on top of having to live with a big financial burden, not to mentioned abt the misery he incurred to his dependants..tsk tsk

January 14, 2008 12:35 AM

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