Broken crockery and expensive insurance

The value of shopping around

Two news stories have caught my attention lately which show the importance of being active with your insurance, whether it's your business insurance, or your home, car and contents.

This first is about insurers profiting from people being inactive with reviewing their policies each year. The gist is that motor vehicle claims costs have gone down relative to the cost of insuring a car. The reason for this is largely that there is a lack of competitive pressure, because people just let their policies roll over year after year without looking to see if what they're getting the best deal.

In New Zealand we have a small insurance market, dominated by two Australian giants; IAG (who own State, AMI, NZI, and probably Lumley in the near future) and Suncorp, with a few locally owned middle and small players. This means that if you, the consumer, don't go looking for a better deal, there is little pressure for the insurers to give you a better deal. In insurance broker language getting competitive quotes is called "going to market". This is where brokers come into their own and earn their fees. Even if you don't use a broker, almost every insurance company has an online quote system, making shopping around easy.

I see a lot of smart people who I know can drive good deals for in complex business transactions, who will spend hours looking for a deal to save them a few dollars on bike parts, computers, travel etc, while ignoring the fact that ten minutes searching will save them hundreds of dollars a year on their insurance.

Vases and dinner sets

The second story is sadly familiar; Potter Paul Melser, had a business insurance policy for 30 years, and only after the last week's Eketahuna earthquake wiped out $8,000 worth of stock has he found out that the policy only covers raw materials (clay, gas and glaze etc), rather than than the wholesale stock value (raw materials plus labour).
Over the years I have seen this scenario many time; a business person takes out a policy when starting up. Because insurance is complex and uses technical language, the customer often doesn't fully understand what the policy does and doesn't cover. The policy goes in the drawer and is given no thought for years, or decades. Then disaster strikes, a claim is made, and at this point the business person discovers that they are only partially insured, or worse, not covered at all for their biggest risk/asset.

The insurance companies aren't at fault for this. If you buy a product from any other business, say a piece of pottery, put it in a drawer for 10 years then pull it out for a dinner party, then discover that it's not what you thought it was, is it the potter's fault that you don't know the difference between a vase and a dinner set?

Insurance companies are not professional advisers, it's not their job to review customers needs as they change, and its not their job to explain what a policy covers (although if you ask them a question they are obliged to answer accurately). It is presumed that if someone (especially a business person) doesn't understand something they'll ask the question or get independent advice.

Which brings me to my point; the decisions we make when we take out an insurance policy, renew a policy, and accept (or reject) a claim settlement, are often worth thousands of dollars. These decisions can be the difference between profitability and liquidation, keeping or losing a home. We seek advice and shop around for any other product or service which costs thousands of dollars a year. We need to treat insurance in the same way.