On a September evening in 2015, my wife and I played the back nine at Thousand Oaks Golf Course. I was having a good round - one stroke over par going into the 15th hole, a 150 yard par three. I hit a 7 iron off the tee and said to my wife “this could be the one, honey”, which I’ve made a habit of saying every time I hit a decent tee shot on a par 3 for about the past year, figuring I’m due to ace one. I’ve been playing golf for over 40 years and have never had a hole in one. Sure enough, the ball flew straight at the pin, hit the green 8 inches to the right of the hole, took a short hop left, and clank… in the hole!
I was pretty excited about my stroke of luck, so I put that ball away for safekeeping after taking a couple of photos with my smartphone. I thought to myself, this has potential to be my best 9 hole score ever, maybe even a par round, since I’m now one under. I proceeded to bogey the next hole and double bogey the following two holes for a final score of 40… a good score for me, but a disappointing outcome nevertheless. I left the course angry and disappointed, having blown a great opportunity to score low, when I should have been elated about my hole in one.
So when is a hole in one like cheap insurance? My experience reminds me of a guy, let’s call him Bob, who is initially excited about the savings he found when he shopped his insurance and switched to an insurance company that had a lower price than the company and agent he knew and trusted for many years. When his home was later hit by lightning and caught on fire, burning the house, the garage, and the vehicles inside it, he found that his new insurance company wasn’t as fond of paying claims as he was accustomed to with his old insurance company, even though the new company’s billion dollar advertising budget made them look pretty good on TV. In the end, he saved a couple hundred dollars on his insurance premiums, but lost thousands on his new company’s stingy claim settlements.
My excitement over my hole in one and subsequent disappointment and anger over how I finished the round is very similar to Bob’s excitement over saving money buying cheap insurance and subsequent disappointment and anger over losing thousands in a claim settlement.
The price of insurance, like any product or service we buy, is built by adding up the costs of producing it. By far the largest input to pricing insurance is the cost of paying claims. This makes up about 75% of the premium for most insurance companies. If an insurance company can reduce this input by paying claims sparingly, they can offer lower premiums.
There are several ways an insurance company can gain a pricing advantage by reducing their cost of paying claims. One is to be stingy with paying claims that are covered by the policy… make the policy holder fight for every nickel. Another way is to write insurance policies that have more exclusions and limitations than average so they don’t have to pay some claims that other insurance companies cover. These are the “gotcha!” exclusions. Your last policy may have covered these claims, but the cheaper one doesn’t. Gotcha!
And here’s the tricky part about “gotcha” clauses… they’re inside the policy. The actual details of what an insurance company covers are not on the quote; they are within the 20 or 30 pages that make up the policy that you receive after you buy it. The quote may appear to be similar to what you currently have (so called “apples for apples”) - the limits of liability and deductibles are the same - but the wording within the policy is what really determines which claims are going to be paid and which will be denied. This is where the rubber meets the road.
An insurance company that combines stingy claim payments with restricted coverage can really gain a pricing advantage, and then spend a billion dollars a year advertising to the world how saving money on insurance should be everyone’s goal and is so mindless that it can be done while brushing your teeth. Turn on your TV or look in any direction and you’ll know who these insurance companies are… their names are so prevalent that you even see them in your dreams (a billion dollars will buy a lot of advertising space!).
And, what about the importance of good advice? Many of the highly advertised insurance companies don’t provide experienced, knowledgeable agents to advise you on selecting coverage and answering your coverage questions. And getting poor advice can cost you big in the long run.
So, when is cheap insurance really like a hole in one? Only immediately after marking a 1 on your score card. From then on, it’s all double bogeys.
This article was written by Dave Boer. Please send questions or comments to Dave at email@example.com.