Ariel Munin

Insurance in Simple Terms - Should we insure everything?

16/08/2011

In the previous chapters we discussed the essence of insurance, its history and development. Now the question is: what needs to be insured? Everything? The car was covered by comprehensive insurance when bought new from the importer, but, after 12 years, does it still require comprehensive coverage? How can we know whether there is economic justification for paying a premium to insure a certain risk?

It is important to remember that insurance is intended to cover the economic damage sustained by an individual in a particular instance. The damage must be significant, that is, costly for him to agree to pay the premium and insure the risk. For example: would we be willing to pay NIS 1 to insure a pen costing NIS 5? The answer is no. If the pen breaks, there is no economic damage. We will buy another pen in the store for NIS 5. At a premium of NIS 1, it is not worthwhile to insure the pen. However, if it is a rare pen, worthNIS 15,000, it is likely we will want to insure it for fear of losing an asset acquired through so great an investment.

It is all relative: the greater the potential damage, the more we will prefer to hedge the risk and insureourselves. If we could have an agreement with the Almighty that damage to the car will never exceed NIS2000, we would certainly not pay NIS 2300 over the years for comprehensive insurance. But no one has such agreement and the damage following theft or total loss can reach NIS 100,000 or more.  

Another factor to be taken into account is the objective and subjective probability of damage occurring. For example, during the last 15 years, an average of 20,000 cars was stolen annually in Israel and, therefore ,there is an objective probability of theft. That everyone knows someone whose car was stolen contributes to the subjective feeling that theft may well occur. For this reason, most people insure their cars againsttheft. In other words, not just the economic damage itself but the fact that theft happens often, leads people to insure themselves.

When the vehicle is less expensive, costing NIS 11,000 for example, one can debate whether it is economically worthwhile to pay 20% of the vehicle’s value in insurance. (To illustrate what 20% is, consider that the insurance premium on a car priced at NIS 140,000 would be NIS 28,000!) In the case of the pen costing NIS 5, if we know that it tends to break, then maybe insuring it despite its low cost is justified.

In summary, the decision to insure or not depends on the level of economic damage and the likelihood of its happening.  If there is a high probability of damage, we prefer to hedge the risk and buy insurance. Most of us hate taking risks and would not want to "fall" into the statistics and lose our property.

Our sages of blessed memory said: "the greater our possessions, the greater our worries". One who has more wants to worry less and insures himself. Doesn’t a rich man need insurance? Are there instances when we could insure only some of the risks? Read about this in the next chapter.

*Translated by Elsa Hadar

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