Insurance is a rather simple form of gambling. The insurance company offers odds on the different ways you might suffer a loss. You can place a bet and, if you suffer the loss in the predicted way, you claim your “winnings”. Well, that’s changing the words around to make you think, but the spirit of this is correct. It all comes down to the ability of the insurer to predict how many people will lose money and how much they will lose. The total amount plus a margin to cover administrative costs and provide a profit, is then divided among the policyholders as the premium. So why should the insurer give you a discount? The answer comes down to those predictions. If you do something to change the odds on you losing money, the insurer rewards you.
Take something as simple as a fire alarm. They cost very little to install and maintain. Yet, if smoke is detected early, you can either put out the fire before it has a chance to take hold, or you call in help before your home burns to the ground. So a small investment earns a big reward. Now add in another fire-related variable. Did you have the good sense to buy a home close to the fire department? If so, your rate will be lower than for the people who decided to live somewhere off the beaten track. Even if they have early warning from an alarm, it still takes too long for a tender to arrive. Now what about the cause of the fire? Old homes have bad wiring that often causes fires. Get a certified electrician to make your home safe and you earn a discount. Similarly, new pipes don’t leak and properly maintained furnaces don’t catch fire as often.
Now think about the structure. The web site run by your local Insurance Commissioner will have details of the recommended technical specifications for roofing and other materials that will earn a discount if you upgrade your home. Homes of straw blow down when the wolf storm blows. Better to build your home of bricks with a sturdy roof. Continue reading →