Hidden costs of cheap insurance

InsuranceWHILE the cost of insurance is a significant parameter that influences someone to make a decision when buying insurance, it should not be the only one.
There are other factors one should take into account to make a wise choice.
It is often said cheap is expensive, this is a true saying in most cases after a careful evaluation.
A friend of mine who had insured with a top insurer over the years decided to change insurers because the new insurer gave him about half the price charged by his old insurer.
He did not even bother to go back to his old insurer to negotiate for better terms because the offer from the new insurer was a deal cracker according to him.
He did not even consider the claims settlement service of the new found insurer, a key factor in insurance because when one buys insurance they are essentially buying a promise that should an insured loss occur then the insurer will compensate them.
At the time of loss whether the insurer is able to timeously fulfil that promise or not is what differentiates a credible insurer from an unreliable one.
My friend logged in a claim but the insurer did not meet his expectation.
The case dragged on and on until my friend came to seek advice on what he could do to have his claim expedited.
During this period he had to use public transport for his errands because the vehicle which was involved in an accident was his only car.
After advising him to seek the regulator’s intervention, his claim was paid although it took some considerable period of time.
Soon after his claim was settled he came back to me and said he was going back to his old insurer because he was so disappointed with the new insurer for taking so long to pay the claim.
Having been writing this column for about five years now, I have received numerous complaints of delayed claims settlement from many readers.
Most of them are those who used incommensurate price as a determining factor to buy insurance.
Well, my advice is that customers should not only look at the price, they should look at all terms offered by the insurer.
Among the critical ones customers should ask an insurer on their claims settlement procedure and how long they will take to settle claims.
A commitment by word of mouth is not sufficient, it is legally unreliable. It must be documented so that if the insurer fails to walk the talk they can be legally taken to task.
Another factor that is key when making an insurance decision is the financial muscle of a given insurer.
Sometimes it is important for a client to request for the financial statements of an insurer especially on big risks.
If the insurer’s financial position is weak or does not suggest it can pay major claims then the customer should try another insurer.
There is also what is called reinsurance which the insurer arranges so that they increase their capacity to handle risks which are beyond their capacity.
Reinsurance is a crucial factor. Insurers and reinsurers would agree on terms which will in turn be communicated to the customer.
It becomes risky for an insurer to take on a risk which is beyond their capacity without reinsurance support, it can burn their fingers if there is a claim.
This practice usually takes place in the face of competition especially where the customer is price sensitive.
A desperate insurer is able to win by offering lower price but whether he can get reinsurance support should be a concern which an infirmed customer should ask the insurer.
I have seen some customers who are very particular about reinsurance programmes arranged by insurers such that before placing business they need this information.
An insurer who gets business at ridiculous pricing is unlikely to find credible reinsurers.
I know of a customer who went for cheap insurance and when they had a claim this insurer proposed to pay the claims in instalments over a period of time.
“Why should a claim be paid in instalments as if it is paying premium?” the customer consulted me. All I said to them was that it is the cost of cheap insurance.
The insurer either failed to find reinsurance support or found a reinsurer who was not credible enough. These mechanisms have ripple effects that will ultimately affect the customer.
Therefore the best way to make an insurance decision is not to go with price alone, there must be other factors and the major one should be the ability of the insurer to pay claims.
Insurance is beyond a theoretical promise, it is the ability to timeously pay a claim when a customer suffers an insured loss.
Comments: webster@picz.co.zm or webster_tj@hotmail.com or on face book search for Insurance Talk-Zambia page or call/text 0977 857 055
(The author is a chartered insurer with 12 years industry experience)