Resist the temptation to cut back on insurance
With many households currently needing to look at ways to decrease spending, it’s times like these that we tend to see short-term solutions applied to problems that need a long-term mindset.
As we navigate difficult situations, our horizons tend to shrink; we think about getting through the month, week, or even day. This can have the unfortunate consequence of decisions being made that may be detrimental to us in the long run.
Though it’s too early to tell what behavioural patterns will emerge from the likely economic fallout to come, one thing that’s been on my mind is the danger of households reducing, or cutting altogether, their insurance cover in an effort to save some cash each month.
Budget trimming is happening nationwide as belts are tightened to reflect new financial realities. Under pressure, one item families may be tempted to reduce is their various insurance premiums. Though insurance is one of those spends that could be seen as a luxury for some, it’s also a cost without a visible benefit until the worst happens. It doesn’t provide daily entertainment, feed us, or get us from A to B.
But turbulent times are arguably the worst times to be without insurance.
Having chewed through savings, and experienced income instability or loss, households could put themselves in a position that’s more vulnerable to the unexpected in an effort to reduce expenditure.
Self-insurance is out of reach for big-tickets items for most Kiwis, and even less likely right now. A bump in the road during good times could currently feel more like a giant sinkhole. We’re less able to absorb the shock of an unexpected event while we’re still dealing with the consequences of a very unexpected event.
If cuts have to be made somewhere, what’s the alternative to scrapping insurance altogether?
Every case is contextual, but broadly speaking I’m advocating you do everything you can to keep your current insurance cover (assuming you were correctly insured pre-Covid-19). And there are actually a few steps you can take to avoid cutting it outright.
If you’re needing to save a bit, but still value your insurance coverage, reaching out to your insurance company is a great starting point. They may be able to directly support you or your family in some way that doesn’t result in your being left uninsured.
This is something the Insurance Council of New Zealand suggests as well: ‘‘... insurers are supporting their customers with a range of measures to maintain protection for them while cushioning the financial impact for those in hardship by adjusting terms to reduce costs and payment arrangements.’’
Of course, this is done case by case, but coming ready to discuss your situation and what you may still be able to contribute is certainly a conversation worth having.
Insurers are being pretty flexible. The Insurance Council says: ‘‘Some insurers have set up hardship funds, some given refunds for when cars weren’t used, some have given premium deferrals among other solutions’’. So be as forthcoming and transparent as you can to ensure your insurers are aware of your new financial reality.
Other steps you can take proactively are to assess whether your current insurance is fit for purpose. You might have additional benefits that could be temporarily dropped, or you might find your sum insured is higher than it needs to be.
You could also look to lower your premiums by sharing a little more of the risk with a higher excess. Of course, before deciding to do that, you need to be sure you can afford to pay the excess should you need to make a claim. But this temporary tradeoff might allow you to keep your coverage while you wade through the uncertainty.
While these suggestions are the ideal course of action, at times like these there will be some households that genuinely don’t have a choice but to reduce their insurance expenditure, in part or completely. For these situations, it’s really important to fully consider the new context this creates and how you can adjust your behaviour and make a few small changes to try to minimise your risk.
Looking at the options that risk management principles present, you can avoid risk, accept risk, minimise risk, or transfer risk. Typically most of us will live with a blend of these options and this mix will change through our lives, accepting certain risks, minimising some and transferring others by taking out insurance.
Those who can no longer afford to transfer risk to an insurance company will want to intentionally decide which risks to accept, avoid and minimise, not just slip into a default state of accepting all the risks.
Avoiding risks, while possible, can make life a lot more difficult. Using car insurance as an example, if you really can’t afford car insurance, you could sell your car and walk everywhere. But if you depend on a car to drop the kids around town, or to get to work on time, the extra burden may rule out avoiding this risk altogether.
Instead, you could check the current value of the vehicle to make sure you’re not insuring it for more than market value, or reduce your cover to third party and theft, and look at a few behavioural changes to make the risks associated with driving and owning a car as small as possible. Maybe you park off the street as much as possible, or carpool every second day with a colleague to bring the risk down further.
Exactly what changes you make depend on what insurance you’ll no longer have in place, what cover remains, and all the intricacies that make up your daily life. But the underlying principles of considering your options, and the long-term consequences, remain applicable for everyone.
Insurance is an important component of our financial resilience, especially for those who can’t take a financial shock – that last part probably rings true for a lot of us right now. Before you cut insurance, think about whether you’re prioritising it correctly (maybe it is more important than that Netflix subscription), and work alongside your insurer.
And where possible along this financial journey, be sure to include your kids, or young people in your life. This experience, although difficult, confronting, and stressful, will develop your financial capability; your ability to apply for financial knowledge through enriching behaviour.
Including your kids (ageappropriately) in this experience will develop their financial capability too, putting them in a really strong position should they ever have to navigate a similar experience.
Insurance is a cost without a visible benefit until the worst happens.