25 HOW INSURED ARE YOU REALLY?

In Adam Smith’s day insurance companies made, ‘very moderate profit’ so presumably the premiums were reasonable as he states, ‘The neglect of insurance upon houses is in most cases the effect of no such nice calculation, but of mere thoughtless rashness of presumptuous contempt of the risk.’

Smith would probably turn in his grave if he could see how those ‘very moderate profits’ ballooned in the centuries following his death. So too might the two other Scots credited with inventing the insurance industry, as we know it today.

DEFINING IDEA…

For almost seventy years the life insurance industry has been a smug sacred cow feeding the public a steady line of sacred bull.

~ RALPH NADER, ATTORNEY AND POLITICAL ACTIVIST

Friends Robert Wallace and Alexander Webster were hard-drinking Church of Scotland ministers from Edinburgh, who were acutely aware of the harsh conditions that people in their parish lived under. They were particularly concerned about the vulnerability of widows and children of ministers, who received half the year’s stipend in the year of the death, but not much else. Together with fellow mathematician Colin Maclaurin, they created the first true insurance fund. Scottish Widows, as the fund became known, is still a major force.

Today, insurance has a fairly poor reputation for charging escalating premiums, while at the same time creating complex policy documents that confuse and discourage claimants. Small print tucked away at the back of a long and dull document ensures most people never read it. Consequently when something goes wrong, they often receive an unpleasant surprise.

In August 2005 Hurricane Katrina tore into the city of New Orleans: winds reaching 140 miles per hour ripped houses from their foundations and a 9-metre storm surge breached 3 of the levees protecting New Orleans from Lake Pontchartrain and the mighty Mississippi. The result was total devastation. Only 5 homes out of 26,000 were not flooded, 1,836 people lost their lives and Katrina exposed the inadequacy of the insurance industry. The people of New Orleans were not ‘thoughtless’ or ‘rash’—they had insurance. No fewer than 1.75 million claims were made, with estimated insurance costs of $41 billion. Needless to say, every scrap of small print was used to avoid paying as many claims as possible.

In his book The Black Swan (2007), Nassim Nicholas Taleb talks about the random events that underlie our life. He tells the story of a casino that spent hundreds of millions of dollars on gambling theory and high tech surveillance yet four of the greatest, or narrowly avoided losses fell outside their sophisticated ‘insurance’ system.

Perhaps paying for insurance was smart in Smith’s day, but is it really possible to insure yourself against risk when all the real risk is totally unpredictable and standard insurance often not worth the paper it’s written on?

HERE’S AN IDEA FOR YOU…

Find all your insurance policy documents and read them. If you want to save time, start at the back and read forward. That way, you’ll miss all the sales fluff and congratulatory praise for your wise decision and skip right to the facts. Pay particular attention to the small print and caveats under which your claim will not be paid. Is it worth it?