Risk is a part of everyday life. Insurance helps us gain and sustain financial security, especially during times of vulnerability. Yet there is...
Eight reasons why risk and insurance should be managed holistically and not in silos.
DIscover eight reasons why risk and insurance should be managed holistically and not in silos.
Eight reasons why risk and insurance should be managed holistically and not in silos
Eight key takeaways:
- Risks in life go in both directions: Upside and downside. Gains and losses can offset each other.
- There is always going to be residual risk that needs to be accepted. Rainy day funds and savings should be considered across everything.
- Convenience – acquiring, managing, and paying for policies and dealing with claims can be a lot more streamlined and centralized which can result in much less friction and more convenience.
- Personalization – Insurance was built around products not people. A holistic approach allows for much better personalization of a protection portfolio.
- Coverage overlaps can result in over insurance.
- Savings on insurance premiums – you can bundle.
- Purchasing insurance with set priorities based on limited budget.
- Self – insurance vs investments: by smart management of your rainy day fund you may decide to invest more rather than pay for more premiums.
Diversification - Offsetting losses with gains while maximizing returns
Not all risks manifest themselves at the same time, sometimes downside and upsides realizations naturally offset each other to some extent.
Risk elimination, mitigation and financing come at a cost; maximizing ROI requires making smart choices across all available options. Here is an example for dealing with the risk of a car accident:
- Elimination: Not driving a car at all. For some people leveraging ride sharing services or public transportation might be a better option when considering: comfort, cost, and risks associated with driving.
- Mitigation: Purchasing cars that are a bit more expensive but are equipped with driver assistance packages to reduce the risk of accidents.
- Financing: Purchasing comprehensive auto insurance so the insurance company finances costs associated for a loss such as theft.
- Acceptance or Self-Insurance: For many older car models, purchasing a comprehensive insurance policy is not worth it in terms of premium return. Increasing rainy day funds might be the better solution.
A holistic approach to risk management and insurance should assess and analyze the cost ROI for different solutions and diversification across the risk portfolio.
Smarter Financial Planning
Most people have an overarching set of financial goals they want to achieve. To buy a house, save enough money to retire at age, or even a dream vacation However, when it comes to long term planning, suffering a loss is often not considered, specifically the odds of financial distress in different loss scenarios. A unified holistic approach can use powerful statistical models and actuarial science to calculate the expected loss for an individual for each scenario and as a whole, taking into account diversification. Matching the outcome of these models with an individual’s appetite to accept residual risk across all risk categories, as well as their budget and financial goals can provide a much more accurate forecast and plan for financial wellness.
Covering more while paying less for insurance
Almost all insurances require premium payments and it can get very expensive very fast. When you have a limited budget, it is important to maximize the protection by prioritizing coverage for losses that can be more devastating. For example, purchasing disability insurance over dental insurance. Or purchasing more life insurance than comprehensive coverage for your car.
Convenience in dealing with insurance
Based on the number of people and assets an individual is trying to protect, they might be dealing with upwards of ten different policies. Acquiring each policy, comparison shopping for each on an ongoing basis, making payments, accessing policy information, and most important in the claims process, increasing the number of insurance companies an individual has to deal with can significantly increase the friction. Having centralized dashboards to access all relevant information, acquire policies, ask questions, and to potentially get support with claim can result in a much better user experience.
Personalization of insurance portfolio
Insurance was built around products and not people. That means an insurance company looks at the profile of a driver, groups it together with other similar drivers, and offers an insurance policy that can be a good fit for all those people. The policies and recommendations are all about what the average driver and average risk looks like and what protection it may need. In an ideal world, an holistic approach should look at the aggregated needs of a family, and tailor their policy to the overall risk exposure and specific needs. Although, holistic is not the entire solution to this problem, it definitely can be a major first step towards creating tailored flexible insurance policies for any risk profile
Budgeting right based on priorities
Almost all insurances require premium payments and it can get very expensive very fast. When you have a limited budget, it is important to maximize the protection by prioritizing coverage for losses based on your objectives.
Objectives may include:
- Protecting personal financial assets and to provide liquidity in the case of catastrophic losses
- Minimize probability of financial ruin and blowing through the entire savings in the case of an emergency
- Take advantage of network related discounts, premium subsidies and defer taxes
- Get access to certain services, goods, and rights.
Each objective can result in a completely different prioritization of insurance in the case of budget constraints. It may result in prioritizing losses that are more likely to happen but less devastating (like car accidents), or less frequent but more devastating (like long term disability).
Avoiding overinsurance and overlaps in coverage
A good example of this would be auto insurance. An auto insurance policy can overlap with health insurance, umbrella insurance, and disability insurance. No recommendation is complete without considering the existing policies to avoid overlaps and purchase of unnecessary coverages.
Bundling to save money on premiums
Many insurance companies reward customers, sometimes as much as 25%, when they bundle their policies. The reason for this is that when an individual bundles their policies, the insurance companies benefit from: better retention, no extra acquisition cost, and overlapping coverages. The discounts are their way of sharing some of the profits back with customers.
Bundling typically works in two major ways: Bundling multiple separate policies with the same insurer or adding an endorsement to an existing policy instead of an additional policy.
Self-insuring like a pro
Insurance is built for losses that we cannot afford yet the financial investment does not always make sense at certain times. The basic idea behind self insurance is that by avoiding making regular premium payments, you can save and potentially invest a lot of money in the long term. Furthermore, by not having to pay for insurance company overhead expenses, self- insuring can potentially make a lot of financial sense for losses you can manage. Taking a holistic approach to self insurance is essential to anticipate a variety of scenarios and also save for unexpected costs.
At the end, it’s all about peace of mind
Taking a holistic approach to insurance ensures the consideration of various loss scenarios while also providing coverage and protection. A siloed approach to risk management misses gaps and the long term impact of risk compromising the essential component: a peace of mind.
Do you have the protection you need?
Life is full of risks. To your family. Your assets. Your future. The problem is traditional solutions that propose traditional answers, one policy at a time.
COVU’s fast and free Protection Plan is an unbiased analysis of all your risks. We’ll recommend what insurance to buy — and which policies you can safely cancel to save money.