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Does anyone know what insurance is supposed to do?

An insurance instructor sent an email to me using a rather terse tone and advised me that I did not understand insurance. In his words, casualty insurance does not protect assets. He advised that casualty insurance protects against, well, damages assessed for a situation in which the insured is liable.

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What is a person going to use to pay to fix the damages if they do not have insurance or adequate insurance? Cash usually. They may borrow the cash but they must write out a check. What is cash? Cash is an asset. If you look on a balance sheet, the very first line item is "Cash and Cash Equivalents." If an insurance policy pays to fix the damages in lieu of the insured having to write a check, the insurance policy protects the insured's cash assets. The insurance policy protects the insured’s balance sheet simultaneously because cash is on the balance sheet.


ZERO difference exists between casualty insurance protecting cash and property insurance protecting property relative to protecting an insured's balance sheet. Whether the loss is a $100,000 liability judgment or a $100,000 fire loss, the damage to the balance sheet is $100,000. Insurance is designed to protect the balance sheet.


I read an article recently regarding parametric insurance. True professionals and forward thinkers should study parametric insurance because it has a significant future. Standard insurance companies are not offering it and may never offer it, but do not get caught not offering it to clients when applicable because you will lose to more advanced agents and brokers.


In this article, the interviewed experts were comparing parametric insurance to indemnity insurance. They made many good points. However, one person stated that parametric insurance is not asset protection, but that it is balance sheet protection. What is on a balance sheet? Assets and liabilities. If one protects the balance sheet, one protects assets. It is impossible to separate assets from the balance sheet. Maybe he misspoke or was misquoted because he should know better.


Insurance is designed, 100%, to protect the balance sheet. What does someone get for their insurance premium? Asset, i.e., balance sheet protection. I have interviewed thousands of producers, and most do not know this fact. When I asked producers what someone gets for their insurance premiums, they give all kinds of answers like, "peace of mind," "a good deal," "savings," ad nauseum. The correct answer is the insured gets balance sheet protection. They may get some peace of mind but given that the producer has no idea what insurance actually does, their peace of mind is misplaced because the coverage is almost guaranteed to be inadequate.


Consumers, whether personal lines or commercial lines or life (not benefits because almost all benefits insurance is not insurance), who do not know what they are actually getting for their premium dollars will not value what they are buying. They will buy the commodity "insurance" for the least price and only learn later, painfully, that the cheaper price resulted in inadequate balance sheet protection.


One of the keys to the most successful producers' success is they have been excellent at describing and even showing the financial math of what an insured gets for their premiums. For example, if the premium is $50,000, what is the monetized value of the asset protection? I have seen this model work excellently in personal lines and especially in commercial lines. The reason it works is the insured gains an appreciation that they are actually immediately benefiting from their premium expenditure.


However, this approach only works if the person selling insurance knows what insurance actually does. I hope you now understand insurance's basic purpose completely.

 

NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand Insurance Education, Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.


None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.

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