As an insurance broker, you do tend to hear that insurance policies are always too expensive. But is that true? Is insurance just guesswork, or is there a logic and a structure behind the way premiums are set? Is the premium then too high or too low for a jeweller? Or to put it another way, are you prepared to pay this price for security and peace of mind?
In practice, it is rather more complicated than this, but in theory, insurance boils down to collecting enough contributions from everyone involved to be able to cover the claims from the same group of people. The starting point of the system is the principle of solidarity. Everyone contributes their premiums in order to be able to pay out the claims from anyone. The cost versus the risk of a claim is, so to speak, spread across everyone who is involved. In this sense, insurance is therefore theoretically always cheaper than being prepared to pay up for your own claims.
Under ideal circumstances, premiums and claims are nicely balanced. But unfortunately, insurance is not an exact science. Insurers have to try and estimate the frequency and size of claims as accurately as possible. To do so, they rely on statistics and the calculation of probabilities. Based on these estimates, they decide on the level of premiums needed in order to be able to apply a fair allocation key. However: each of the policyholders only wants to contribute to the common system in proportion to his or her own risk. It is obvious that a small jeweller should pay a lower premium than a large jeweller.
The insurer’s earnings therefore depend on the level of claims. If the total amount of claims in a year is higher than originally estimated, then the insurer makes a loss. If the total claims are lower, then they make a profit. Every year is different. Specialist insurers therefore look at their results over the long term. The principle of taking a long-term view can best be compared to the Biblical tale of the 7 fat years and the 7 lean years in Egypt, that you may remember from your school days.
Specialist insurers try to maintain their premiums at the status quo in both fat and lean years. This means that when things are quiet, without many claims, they are often confronted with low premiums from opportunistic insurers who try to move into the insurance market for jewellers. But as Machiavelli once put it: it is a common fault of men not to reckon on storms in fair weather. These opportunistic insurers often disappear just as fast as they sprang up.
Behind every insurance premium, there is a train of logical thinking. Based on the long-term results of various specialised insurers, you can see that from the jewellers’ point of view the current premiums are “honest” premiums. Even though, to a jeweller who has never made a claim, the premium may seem rather expensive, for a jeweller who has made a large claim it is easier to put the price of the premium in context. The important question you have to ask yourself is always: is the saving you would make on your insurance premium worth the uncertainty and worry to you, or not?