In this irregular series on personal finance, my next topic is protecting yourself against disaster.  Now there are a few main aspects to this:

• Have adequate vehicle and dwelling coverages.
• If you are worth suing, have an umbrella policy as well
• Use insurance for big disasters only.  Don’t use the insurance company to pay small claims.
• Adequate business coverages if you need them.
• Buying insurance from a company that pays claims without too much argument.
• Keep your credit rating good, it reduces all insurance premiums, because a credit rating is a measure of moral tendency; people who are careful with their money tend to be careful with everything else.
• Avoid minor coverages; they aren’t worth it.

The first thing to note is that the lowest premium may not be the best option.  Companies that sell policies touting their low cost are typically selling minimal coverages, which may not be adequate to fund all claims in a real tragedy.  Other companies make it tough on claimants.  It can be worth it to review the complaint records per 1000 policyholders at your state insurance department website.  As the story goes, and I won’t name names, a wealthy guy got a policy from XYZ Insurance, and was bragging about the low premium to a friend.  The friend, who had a policy from Chubb, said, “You don’t have an insurance policy!  You only have the right to sue XYZ Insurance when you have a claim!”  (I like Chubb; no, they don’t insure me, and I don’t own shares…)

Make sure your dwelling protection is adequate to rebuild and replace possessions.  With inflation, and housing has had a big dose of that, policies can quickly become inadequate.  If the premium gets too high, better to raise the coverage and the deductible, leaving the premium even, than to leave the policy alone.

An umbrella policy can be a cheap add-on; I left GEICO because they would not underwrite an umbrella on me; too much risk from my writings on the internet (and I was on the board of a small college at the time).  It is definitely worth looking into if you want to protect yourself from liability.

If you are well enough off, with your own business, and you have a lot to protect, a good insurance broker can be an aid in all of this.  He is a professional who will proactively look for the risks you might be missing, and will find adequate companies to cover you at a reasonable price.

This would dovetail into another piece,  “Keep your credit rating good, it reduces all insurance premiums, because a credit rating is a measure of moral tendency; people who are careful with their money tend to be careful with everything else.”  This applies to personal coverages and small business coverages.  Insurers use this data to greatest extent they can, not to be unfair, but because it correlates so highly with low losses.

Finally, avoid little add-on coverages like warranties, and use your main coverages for large losses only.  Have money set aside for the vicissitudes of life.  A large deductible reduces your costs considerably, and signals to the insurance company that you regard yourself as a better class of risk than the average guy.  They will offer you better rates as a result.

Thanks to Eddy Elfenbein for sending over the data on how the market does over multiple nights when the market is closed.  Unfortunately, the data is skewed because of 9/11, where the market was closed for seven days, and the change from the close to the open was -4.59%.  What should be done with that data point?  When the market closed on Monday 9/10/01, traders expected that the market would reopen as normal on Tuesday, but it didn’t.  The seven day hiatus was not planned, so traders treated it as a one night gap on Monday, but it opened as a seven night gap the next Monday, with negative results.

Now, if you throw out the 9/11 data point, the average price return over a one night gap is 0.005% over the last eight years.  For a multiple night gap, the return is higher — 0.012%.  If you include in 9/11, it is lower — 0.002%.

But what of dividends?  Where do they belong?  They belong to the nighttime returns, because on the morning that a stock goes ex-dividend, on average the price drops at the open to reflect that.  Now, assume a 1.5%/year dividend rate (rounding, the actual is a little higher).  Now the returns for a one night gap are 0.010%, and for a multiple night gap it is 0.024%.  Even counting in 9/11, the result is 0.014%, higher than the single night gap.

One commenter on last night’s post commented that it might not be the risk of holding stock overnight as much as the possibility or occurrence of news flow.  Before the fact, risk and potential news flow are similar concepts.  After all, how does risk shift, but often through news flow changing the opinions that people hold regarding assets?

For a long term investor like me, this all doesn’t matter much.  I’m not going to buy a bunch of futures contracts or ETFs near the close and sell them into the open.  Still, this could be another example of a market anomaly that stems from the perception of a risk which does not occur on average.