Martin and Jimmy jump out of a plane flying at 20,000 feet. Martin obviously has his parachute whereas Jimmy claims to not need one. Whose decision do you think is the riskiest?
First of all, a risk is defined as an uncertainty in relation to the outcome of an event that could be positive or negative. You are right if you answered Martin. In the case of Jimmy, the outcome of his action is certain: he will unfortunately hit the ground. On the flip side, it is not certain that Martin will successfully land. What about when it comes to insurance? Is it crucial to have it right now despite so many weather conditions and daily accidents? Is it really useful to have to protect us against uncertainty? The answer is undeniably “yes” but each and every one of us reacts differently when faced with an uncertain situation. Some will prefer to have as much protection as possible to sleep soundly at night and transfer the risk to an insurer. Others will simply opt for basic protection and bear the larger portion of the risk. Which profile describes you?
Are you always looking to pay the lowest deductible? If so, your risk tolerance is lower and you prefer transferring the likelihood of suffering a financial loss to an insurer. The more you decrease your deductible, the more you are exercising a transfer strategy. This means that you are looking for full coverage to avoid any unpleasant surprises. In other words, you wouldn’t hesitate too much to file a claim knowing that your premium would be likely to increase the following year. It would be interesting for you to check the amount that you’d be ready to take on in the event of a claim to determine the deductible that works for you. You are also welcome to ask your Lareau broker how much you can save if your deductible is increased.
Others will opt for a retention strategy which consists in incurring a bigger financial risk through personal liquidity. You tell yourself that in the event of a loss, you will be able to manage on your own to repair the damages. You are therefore more of a gambler by nature and are willing to cope with the financial consequences of a loss by paying for it yourself than tarnish your insurance record. Your risk aversion is lower and a low deductible is not recommended.
To be honest, there is no such thing as a bad profile but you must make sure that your insurance record is tailored to your situation. Whatever your risk comfort level may be, the ultimate goal is to avoid a claim. Most of us unconsciously use control strategies to protect ourselves.
But can we really control a risk? Can we influence an event that hasn’t yet occurred? Of course not. However, we can plan any eventuality. As the adage goes, “Better to be safe than sorry”. How so?
In short, what matters is not whether you label yourself as a prudent or bold insured, but to choose the coverage and deductible that suit your tolerance towards risk. Whatever your aversion to uncertainty may be, different control strategies are necessary to be prepared in case of an unpleasant situation. So, the question is, will you take the risk?
