Is insurance affordable or not? Insurers tend to think the cover they offer is very affordable, considering all the risks involved. However, most consumers think insurance is unaffordable due to their own financial situations. So how does one go about determining the affordability of insurance?
How insurers determine affordability
When insurers determine affordability, they have to decide whether someone or something can reasonably be insured at a fair price. The insurer has to be able to assume the risks involved at a fair price to both, the insurer and the insured person. If the insurer cannot provide it at a reasonable price, the individual won’t purchase the policy.
In order to set a fair price, the insurer has to do massive research into the possible risks that might be assumed by issuing an insurance policy. This analysis includes studying:
o Potential cost to insurer, insured party, and other policy holders
o General environmental conditions
o Specific location
o Proximity and ratings of emergency services
o General economy on a global, national, and local community level
o Specific financial status and credit scores of individual or business
o General and specific social environment, such as crime rate and civil unrest
o Occupational safety hazards and risks
o Laws, regulations, and building codes in place or pending
o House/Building Infrastructure rating-this is usually based on age of building and the materials used for its construction
o Climatic change risks, as well as current local climate conditions
o Person’s age, gender, marital status, educational level, occupation, and employment outlook
o Person’s health, general well-being, driving record, and criminal history
There are many more factors considered by insurers during the affordability determination process. Basically any and all possible loss or damage from any risk, peril, or hazard is taken into consideration.
How consumers determine affordability
Insurers must consider what is affordable according to the risks being assumed and the potential cost to themselves, the insured party, and other policy holders. However, a consumer only cares about gaining financial protection in case something happens to something they value monetarily or sentimentally. The consumer will therefore do their own risk evaluation, based on what he or she thinks will likely happen to the item and its personal value. If the insurance costs very little compared to the item being insured, then the consumer may consider it to be affordable.
Although the individual will determine the affordability using some of the same factors as the insurer, there will be a difference in the interpretation of the results of the risk analysis. Whereas the insurer will view the peril or hazard as an absolutely occurring event, the consumer views it as a very unlikely event. It’s human nature to assume that bad things will happen to other people but not you, especially when you’re young.
Due to this basic human assumption of invincibility, most people don’t consider insurance to be a high priority. Some don’t consider insurance as a necessity at all. Many people are only interested in attaining insurance because the law or a creditor insists they have it.
For example, someone who barely ekes out a living usually will not consider it a necessity. For that person, an insurance premium won’t seem a necessity to fit into the monthly budget. With money being very limited, other living expenses will have higher priority. Many people in this situation would even consider insurance worthless, figuring they had nothing of value to lose anyway.
However, these people are the ones who need insurance the most. They’re the ones who would have the greatest financial difficulty if something did happen. They couldn’t afford to replace all their possessions simultaneously, nor could they afford to pay compensation and legal fees if they caused another person’s death or injuries. If they couldn’t afford to replace their own belongings, they certainly couldn’t afford to replace someone else’s property if they damaged it.
When insurance has no or very low priority the person will consider insurance at any price as being unaffordable. A low-income consumer most likely will never think of insurance as being affordable. Whether purchasing insurance voluntarily or by force, consumers want the same thing. They all want top quality coverage at very low prices, no matter how much risk might be involved. Unfortunately, most private insurers will never be able to meet this kind of demand without creating a large deficit or going bankrupt due to paying out claims when a large disaster hit a particular area.