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Have Lots of Insurance














The selling of insurance is the biggest scam since snake oil during the California gold rush. The product is awesome but the way it is sold is the capital of Dodge. There are good reasons for this.  No one likes to buy insurance.  It is not an impulse buy. No one is filled with joy and satisfaction when the policy on their car needs to be renewed.  We don't want insurance but we know that we need it. It is prudent to transfer specific risks to a third party, but prudent does not sell.  Insurance companies know their product is unsexy. They, therefore, need to inject it full of collagen and silicone and dress it up in an underwire bra and leather mini skirt.  The job of selling insurance is as attractive as sitting in a toll booth in the middle of a dark tunnel surrounded by incontinent bats.  


To sweeten the deal, insurance companies need to incentivize these salespeople.   I have friends who sell insurance.  They spend half their time traveling to exotic locations to attend insurance "conventions". All expenses are paid by the insurance companies. We are talking about three to four trips a year to ski in the Swiss Alps, desert camps in Dubai, island hopping in the Mediterranean on private yachts,  and private game reserves in the Serengeti.


Now that I have had my little tantrum about how insurance is sold, let me reiterate that insurance is awesome and you should have lots of it. In the previous thought, I said that risk is good and you should embrace it and give it a big wet open-mouthed kiss. However, let me clarify this. I am talking specifically about investment risk. Also, I am not saying that you should take risks just for the sake of taking risks. You take risks when the odds are in your favor and the way you know that the odds are in your favor is through education and research.


You also need to think of risk in terms of potential return. If an investment opportunity presents 3 points of risk and 10 points of return, then you want to go all-in – you want to sell the house, the wife, the kids, and the pets and fill your boots. If an investment presents 3 points of risk and 2 points of return, you want to run for the hills.


Lets now bring this back to insurance. Let's say that you buy a $50,000 car. Let's assume that insurance on that car costs $1,000 per annum. At this point, you can do one of two things – you can decide to insure the car or your car decide not to insure the car. Lets now look at the risk-return relationship. Your risk is that some scumbags will take a shining to your new automobile and decide to steal it. That event would result in the realization of a $50,000 loss. You can eliminate this risk by spending $1,000 on insurance. By spending $1,000, you can avoid a $50,000 loss. This is an absolute no brainer. You need to have car, medical, life and as many other insurances as possible.


Having said this, do your homework when you buy insurance. Let me give you a quick crash course in insurance.


An insurance policy pays a determinable amount of money in the event of a certain event taking place such as wrapping your brand new Ferrari around a telephone pole. The premium of this policy will depend on several factors. One will be the probability of wrapping the aforesaid motor vehicle around that pole.  The more volatile the underlying asset, the higher the probability of that insurable event taking place. Insurance companies do not want men with small phalluses to claim the damages for wrapping Italian sports cars around telecommunication equipment. You may have noticed that I change the wording on the Ferrari. I did not say that insurance companies do not want drivers to crash. I said that they do not want drivers to CLAIM. There is a subtle difference.  


In 2010, in Mexico, a car insurance company released a marketing campaign with the following message. The byline of the campaign was that the client could tell the insurance company how much they wanted to pay in premium. The insurance company would then design a policy for them.  I thought this was marvelous. I gave them a call and said that I was prepared to pay 1 peso in premium. They asked me how much my car was worth, I said 300,000 pesos. They offered me a policy with a deductible of 299,000 – the value of the car minus the 1 peso I was prepared to pay. The higher the deductible on the policy, the lower the probability I will submit a claim. For example, my deductible would have been 299,000.   Back to my Ferrari example, assume the deductible is 50,000 pesos.  I bump the car against a concrete wall after one too many beers down at the pub with the boys. The damage is 20,000 pesos. That loss is for my account because it is below the deductible. You need to pay very special attention to the amount of the deductible.


In many policies, this deductible is either expressed in monetary terms or as a percentage of the insured asset. For example, let us go back to the $50,000 car. Assume the excess is 5% which is $2,500.  Assume now you ram the car into a tree and the damage is $3,000. The first $2,500 worth of damage (the excess or deductible) is for your account and the insurance company will pay the rest ($500). The rule of insurance is quite straightforward – the higher the excess or deductible the lower the insurance premium and vice versa. When you buy insurance, you are well-advised to take the time to read the small print. 

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