When Is Insuring the Right Choice?

Insurance is one of the most important things in the modern world. Whatever you buy or sell, or whatever kind of service you get or provide, some kind of insurance is probably going to be involved. Therefore, it should always be on your mind especially when it concerns your wellbeing, or the health and the needs of the employees you work with. WIth that in mind, in this article we will explore the simple question of when insurance is needed and when is it the right choice.

First of all, ask yourself this simple question: Am I buying too much insurance and do I really need that much?

You will find that it is more challenging to answer that question than you might think. In addition, the trouble to answer it mostly stems from the idea that insuring is generally thought of as a good thing and that everyone should have it for everything.

While there is nothing wrong with insurance, it makes sense to avoid it a lot of the time. But how do you know when it is the right choice to skip on the insurance? That is what you are going to learn in this article. Keep reading to find out when it makes sense to insure, and when it does not.

Do You Need to Buy Insurance?

Before you ask yourself if you need insurance, another question arises. Try asking yourself this instead and go from there:

Do I have to buy insurance at all?

As you might have guessed, in most cases the answer to this is yes. You must buy some degree of employer’s liability insurance if you are an employer for instance, that much is certain. Still, there are a few exceptions to this.

You can safely exclude those situations from your calculations. If you risk a fine of £2,500 every day you are not adequately insured, there is no real way to make it a better choice not to buy insurance.

So as you can see, this is a big part of your work done. Now, you only have to focus on the situations where you have a choice of either insuring or not.

When Should I Buy Non-Compulsory Insurance?

Right, not that we have the field narrowed down a bit, the question is a little easier to answer. But the answer is still less intuitive than you may have thought. A big problem that organisations run into is failing to account for their risk financing time frame. What is this, I hear you ask? Your risk financing time frame is the period over which you can spread the impact of a loss. Here is an example to better explain this.

If you suffer a loss of £100,000 today, how much time will you have to make up for it? If you are insured, it does not really make much of a difference because you can, in theory, recoup the loss immediately. However, you will affect the volatility of your premiums.

If you are not insured, you will have to absorb the loss and have to make up for it until sooner rather than later, you suffer another loss. So, as you can see, you are paying for it either way, whether it is in the form of premiums or from your own self-insurance plan.

For some organisations, this time frame is effectively indefinite and those involved may take full advantage of this. Local authorities, for instance, have constitutional permanence and there is very little risk of one collapsing. Therefore, a local authority has a very long risk financing time frame in case something ends up happening.

On the other hand, a smaller company that has shareholders to answer to, might not have such a long time frame and has to adjust accordingly. Therefore, according to it would be the right choice to insure the things the company can never afford to lose.

When Shouldn’t I Buy Insurance?

Rather than focus on the results of an event, think about the consequences over a long term period. If you purchase business interruption insurance with an annual premium of £1 million, you might need to lose upwards of eight days of business to justify it.

What are the odds of that happening? They are certainly not zero, but they are still quite low. Would it then not be better not to insure and potentially lose two or three business days with potential savings of £500,000 in premiums?

You see, with a risk financing time frame that is long enough, no loss is too large unless it wipes you out right on the spot. Being aware of your risk financing time frame is the key to knowing when it is the right choice to buy insurance.

Think in terms of what the probabilities are that you will need a certain level of coverage you are going to pay for. Do not focus on the outcome of single events but think about the bigger picture.

Insure What You Cannot Afford to Lose

Insuring is the right choice when you need to protect yourself from catastrophic events or when your risk financing time frame is too short to absorb a loss. If something happens and the main thing that you need for your business to run fails, there are going to be shattering consequences you may never require from.

This is why insuring your most treasured things is crucial in any kind of business, however unlikely they may be to break down or become damaged. It is also always the right choice to purchase compulsory insurance. In all other cases where you can easily survive without something, you do not need to insure it. You can have the luxury of thinking in the terms of probabilities, and not events when determining if you really need insurance.

Our InsuranceInspect Services consultancy product can help you to design policies attractive to insurers, reducing your premiums Substantially, Safely and Strategically. Therefore, give them a look if this sounds like something you may need in your life.