Tuesday, 24 November 2015

Insurance.. Oh Dear! (Part 1)

Insurance is one of these things that we buy either because we are required to by law or because it is the done thing. The insurance industry must be unique in that it relieves us of millions of pounds a year without promising us either sex or money in return.

Insurance is like an umbrella. We carry it about on a sunny day but the one day we really need it we find we have left it on a bus. It is also something of a mirage as we will see.

Insurance is the means by which rich people extract wealth from the middle class.

The Chartered Insurance Institute and two insurance companies lost in the clouds.

Many of us pay our insurance policies each month and file the contracts away with a sigh of relief.

The promises seem so specific and the institutions have such venerable names.

In any case.. this is what everyone else does.

Many of us assume that if a company promises to pay us £100,000 in a certain event then that company must have reserves of this magnitude.

Not a bit of it.

Insurance is a game of probability. It can only protect you against events that are in line with probability. If ten houses are normally destroyed in a year then the company will keep funds available for eleven. This is all very well until a real disaster occurs that destroys one hundred homes. What then?

Maybe there will be reinsurance arrangements with other companies that obliges them to help. This helps if the crisis is national in nature but not if if is global. What if all of the companies are in trouble at the same time?

This is not as unlikely as it seems. Reinsurance contracts (which are supposed to prevent such crises) practically guarantee such crisis in our lifetimes.

Then you are alone my friend.

The good news is that we can create our own insurance company! It will be more more solvent than the one we are paying premiums to right now. Furthermore, if we never need to claim we will receive your money back!

Simply create an investment fund (nice and liquid with low risk) and draw upon it if needed. If not- the money is yours to keep.

This avoids all the form filling and insurance premium tax that 'normal' people have to bother with. This way is better.

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