Does your insurance contract reflect your risk tolerance? | lareau English
Martin Decelle, B.B.A., CRM Jimmy Lussier, CPA, CMA, CRM

Does your insurance contract reflect your risk tolerance?

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?

“Transfer” profile

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.

“Retention” profile

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.

Control strategies

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?

  • First of all, the most commonly used control strategy is, of course, prevention. This could mean replacing the water heater before its 10-year life expectancy is up or the roof shingles before the 20-year mark. Prevention is a way to reduce the frequency of risk. Installing an alarm system or adding an emergency submersible pump are also very efficient prevention methods.
  • Secondly, avoidance is also a strategy that can be used. This is where one would not undertake an action in order to eliminate exposure to a risk. Take the example of a person who is fearful of floods, a peril which is considered an exclusion under a personal lines damage insurance. The avoidance tactic is very simple: do not buy a house near a river or a lake. This can seem insignificant but by refusing to be exposed to this type of risk allows the insured to have peace of mind.
  • Thirdly, the mitigation strategy can be used to minimize damage in the event of a loss. Some specialized companies now offer products that allow water supply to be cut off when damage is detected. No matter what your strategy is, please know that all these strategies are efficient and necessary to avoid ending up in a quagmire.

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?

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Martin Decelle, B.B.A., CRM Personal-Lines Underwriter See the profile
Jimmy Lussier, CPA, CMA, CRM Damage Insurance Broker See the profile

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