ACTUARIAL LENSE: How to save on insurance costs
THE Railway Bridge that we pass as we enter the CBD along Seke Road and the Fly-over Bridge along Rotten Row both used to be insured in the past. I don’t know if they are still insured in this day and age, but I am pretty sure they aren’t. Most businesses have seen insurance as a cost that needs to be completely removed from their cash flow statements. Failure to get adequate insurance cover has however led to the closure of businesses – both small and large due to a plethora of risks.Just last year; 6 000 informal traders had their wares razed to the ground at the Glen View Informal Industry Complex, and the blaze almost reached a nearby bank. It is possible for one to enjoy the benefits of insurance without boring a hole in the wallet.I will take you through the basic tenets that must be followed when taking out insurance cover.
Advice for individuals
Whilst individuals do not have much in their arsenal when it comes to lowering their costs of insurance they can still make sure they shop around for the best deal. More often than not, policyholders find out when it is too late that they could have saved money by shopping around for cover. This is eerily true to those who purchase annuities at retirement. An annuity purchase cannot be reversed and many at times pensioners who find out that they could have gotten a better deal, start to feel like they have made a deal with the devil himself.
Individuals can also cherry pick the policy options that come with their policies. Things like cover for radios, towing services, inflation protection on pension annuities and medical cover on motor policies can prove to be more expensive than you think. That being said, there are times where these add-ons are being offered at significant discounts so either way, the point that you will have to do your research still stands. For certain policies, individuals are given a choice to determine how much risk they can retain. For example, a household policy can allow an individual to meet the first $400 of any claim (e.g. theft). This is a great way of lowering your premiums.
Policyholders can also save themselves a lot of hassle by engaging the services of an insurance agent but be sure to be on the lookout for potential conflict of interests. These usually arise in cases where brokers are remunerated on the grounds of how many policies they sell. Even brokers who are not tied to any insurance company can receive kickbacks behind the scenes for placing business with a particular insurer. My advice whenever it comes to financial advice is never take someone’s word for it. Always strive to get an independent second opinion.
Advice for Corporates
Companies have far more options at their disposal when it comes to lowering their insurance spend. Every company needs insurance, even insurance companies themselves take out (re)insurance to cover their balance sheets against adverse liability developments.
Implementing risk management in your business will lower your overall risk profile. Installing operational risk control measures such as disaster preparedness training, sprinkler systems, burglar alarms and the like are all steps that your insurance provider will look at favourably.
Self-insurance is a very popular tool that companies can use to retain some of the risk on their balance sheets whilst surrendering a limited portion of the risk to their insurance provider. Self-insurance involves an active decision to retain risk and also putting in place measures to fund that risk. It is certainly not the same as just deciding not to buy insurance protection and hoping that risk won’t strike in the future. Companies in the same industry (or even the same geographical location) can come together and form a self-insurance pool that they all contribute to and which will meet the risk(s) to which they need protection from. For example, factories can pool premiums in a fire protection pool that they will draw upon in the event of a fire. The same scheme can be employed by tobacco farmers to cover hailstorm damage. After all in this case, fire or hail is a risk that can affect all economic agents within the same area. One clear advantage of self-insurance is that there will come a time where your self-insurance pool becomes so large that you can go on a premium holiday.
Self-insurance can hit some regulatory obstacles especially when it comes to compulsory insurance policies. You certainly cannot self-insure any part of your Third Party Liability insurance cover. To get around this, bigger companies can take this idea of self-insurance up a notch by forming their own insurance company (a.k.a captive insurance company). This has tremendous tax advantages and can give a company direct access to national and international reinsurance markets that have better risk transfer terms.
The problem with the Zimbabwean
All these strategies are all very well and fine but one sticky issue is that if a company forms a self-insurance pool, it can soon become a temptation. There will always be need to buy a Merc for the manager or even genuine investment opportunities within the business might crop up. Because of this, proper legal procedures need to be followed before the regulators can give the green light to self-insurance or captive schemes.
The insurance industry has also somehow limited the ability of policyholders to fine-tune their cover. In other countries you hear of policyholder cooling off periods or even cash back schemes and no claims discounts that give policyholders the added flexibility that they deserve. These innovations are largely absent in the Zimbabwean insurance sector.
Regardless of the above, there is still scope to manage your insurance costs. The question is not whether or not you should buy insurance cover; the question is how much insurance you should buy.
Thomas Sithole is an Actuarial Analyst (Enterprise Risk Management) at Bluecroft Actuarial Solutions. Please refer to his corporate profile on this web address to contact him: thomas.bluecroftsolutions.com
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