Sunday, December 06, 2009

Bus owner practices risk management

I know of a private bus owner who evaluates the following options to insure his bus:
a) Third party only
b) Third party fire and theft
c) Comprehensive.

His old bus has a current market value of $40,000 and the difference in premium needed to cover fire and theft is $200. This works out to a rate of 0.5%. He decided to pay this premium, as he could not afford to take a total loss through theft or fire.

He decided not to buy the comprehensive cover as the difference in premium is too high. He decided to retain the risk and to pay for repairs to his bus on his own. In most cases, this can be funded by the savings in the premium.

This is an example of applying the principles of risk management. Insure the large losses with low frequency, and retain the small losses with high frequency.

I advise consumers to get the relevant facts and decide on the best risk management strategy, instead of relying blindly on the advice of the agent (who has a conflict of interest) or other people (e.g TKL) to decide for them.

1 comment:

Anonymous said...

You don't to be an Actuary to do that. Even a bus driver has better brain than an Actuary.

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