Thursday, December 03, 2009

Avoid over insurance and moral hazard

There was a case of a person who bought personal accident insurance from many insurance companies, and had an accident where he lost an eye. The total amount claimed under the insurance companies amounted to more than $2 million.

The insurance companies suspected that the accident was intentional,i.e. moral hazard. But they were not able to prove their case in court. They lost the case and had to pay the claims.

To avoid moral hazard, some insurance company adopt the following approaches:

a) ask the applicant to declare the total amount that is insured under all existing policies
b) restrict the total amount that can be paid under a claim.

If the applicant declares a total insurance that is excessive, the insurance company is likely to reject the application to avoid moral hazard. If the applicant fails to disclose this material fact in the application, the insurance company has the grounds to reject the claim.

If an insurance company provides insurance for $500,000 and sets a limit of $1 million for all claims for the same event, and the insured has insured for a total of $2 million, the insurance company is required to pay only half of the insured sum, i.e. $250,000.

Tan Kin Lian

3 comments:

Anonymous said...

Most humans are kia-su and have a need for positive affirmation. They like to hear that they have "great potential" and have "bright future earnings prospects". Agents use this emotional ploy to get clients to take up high sum assured, telling them "Are you sure $250K is sufficient for a worry-free life for your wife and to achieve your children's potential, if you are not around? Don't shortchange yourself and your family. They deserve it!" Of course they need to say all these for wholelife products, coz the premiums are damn expensive.

I think all of us needs to get used to the idea that we are actually not worth that much, economically speaking. So yes, get sufficient coverage to protect liabilities and dependents, but realise that if you get excessive cover, you're just overpaying and making the insurer / agents happy. And then when really need to claim, the insurers will investigate whether got moral hazard or not.

Ex-Con

Anonymous said...

so better not over-buying of insurance policies.

Anonymous said...

The problem is salesmen insurance agents don't perform need analysis and the tendency to get out of hand is common. Some people have as many policies as 50 policies. I can't beleive it.Either they are tiny policies taken up over a long period, which is wrong or they are over insured. Either way the policyholders are disadvantaged.
They are not addressing needs.
Consumers must be aware that owning many policies doesn't mean you are adequately insured. You might not.The policies might be wrong policies.
The salesman's approach is to sell and dump as many products on you to make commission and not to free you of worries.
The planner's approach is to ensure that you have the right polices with right amount at the right time.This is called the efficient approach....no resources wasted, no over or under insurance.

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