The value equation – Why cheap insurance is rarely a good deal

March 2017 Unimutual Update
March 31, 2017
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May 1, 2017

The value equation – Why cheap insurance is rarely a good deal

Hands protecting drawn dollar sign on black chalkboard background. Close up.

By Gerald Ewing, Chief Executive Officer

In this modern internet age of online orders and same-day delivery it is rare to find a transaction where you pay for the product today but it is only delivered in the future, generally on the happening of some specified event, and not at all if that event does not happen.  Such is the world of insurance and discretionary protection.

Prior to buying, say, a camera on-line, it is likely that you will have researched comparable models, read reviews and perhaps nosed around the local camera store before purchasing from an unknown ecommerce vendor.  The knowledge you acquired as part of your research gives you confidence you’ve made the right purchase decision and if all goes wrong you have the security of your credit card provider.

In the university sector, as in all businesses, asset and risk protection is somewhat more complex as what you are buying is a promise and in many instances, a pretty expensive promise.  There are few transactions where the Latin “Caveat Emptor”, let the buyer beware, is more relevant.  So what should you look for when deciding which insurance provider to partner with?

I would suggest there are five key points to look at:

  • Reputation and track record
  • Scope of cover
  • Service
  • Other benefits
  • Price

The sum of these five elements constitutes value and when you are buying a promise, particularly a promise to provide financial support and service following a loss, you need to know that you are going to get good value, both in terms of your institution’s budget and its people.  Remember, until a loss occurs, you can’t be sure of how the promise will be fulfilled.

Reputation and track record (r)

The provider’s reputation and track record are at the top of my list because of the high level of trust you will need to place in that party when you part with your money.  Who is the provider?  How long have they been in existence?  What’s their claims payments’ track record?  What do other customers say about them?  What do other customers like you say about them?

Scope of cover (c)

After trust you need full transparency on your cover’s inclusions and exclusions.  This is where it is really important to look at the fine print – the policy wording, see what’s included and what’s excluded, what limits and sub-limits, deductibles or retentions will apply.  This requires attention to detail.  Are there any grey areas?  How will they be treated?  Leaning on a specialist, such as a broker who focuses on the university and higher education sector, can be of great assistance.

Service (s)

Service ranks third on my list very closely behind scope of cover, and at no time is service more important (and obvious) than at claim time.  Questions you may want to consider are:

How well does the provider know your entity’s business?

  • What’s the experience of your peers?
  • Will you get pushed from pillar to post or will you have a dedicated point of contact and support team? How quickly will the claim be processed?
  • What about interim funding?

Other benefits (b)

While not always top-of-mind when assessing your insurance needs, the additional services and features included beyond the policy wording can have a real benefit for the customer.  Does the provider offer risk management advice and service?  What support is there for difficult liability claims and litigated matters?  How do you have a voice in the process?  Is there opportunity for networking and learning from peer institutions?  These benefits can often be quantified by metrics such as time saved and losses avoided.

Price (p)

For many price is the first, and unfortunately for some it remains the only point of reference.  I would argue this is lazy and expedient.  However, if nothing else price is generally a good indicator of what you can expect.  In other words, the lower the price, the narrower or poorer the protection is likely to be.  This is the result of simple business economics.

The major costs for an insurer are claims, reinsurance, marketing distribution and administration.  All insurers are faced with the same matrix and to this they must add a level of profit for their shareholders.  Thus, unless an insurer is able to demonstrate a better claims experience than its peers, the costs base should be broadly similar.

If the price is cheap it is a sure indication that something must have been cut – and the cutting will generally follow the same order as this list – first trust will be undermined as the low priced carriers look to avoid claims payments, cover will inevitably be limited, and service will suffer from all the issues that cost cutting brings.  Additional benefits are likely to be very low order, if there are any.  Simply put, you get what you pay for.

Value (V)

My value equation therefore looks like this:

 

 

 

In the aftermath of Cyclone Debbie, many businesses and personal insureds would be closely examining their policies and questioning whether their expectations of value will be met.  Perhaps proactive assessment rather than post-event anxiety is advisable.

How do your current insurance covers stack up?