A reader asked me the following:
?When I know that you are trained as an actuary it got me curious. They say that actuary assess the risks of insurance products to find value for consumers, at the same time evaluate the probable risks of the product.
?What kind of insurance does an actuary actually buy for his and his family? Insurance are often sold with economic bias so what better way to know then find out from people that use actual data and determined it through quantifiable methods.
?I heard that actuaries often buy only term life insurance only and that investment linked and limited whole life policies do not make sense. At the same time, it would seem that the way you can claim critical illness is such that most of the time you can claim it, you are almost very disabled or near death. In such a scenario wouldnt [sic] a pure death and tpd [sic] term life be suffice?
This is my opinion, given my dealings among actuaries.? I could be wrong.? Actuaries avoid complexity in insurance products.? Why?? In general, complex products hide high profit margins.? Products that are easy to analyze, like term life insurance, are competitive, and profit margins are low.
The same is true for savings products, like deferred annuities.? Actuaries tend to buy simple products that cover basic needs.
Also, they tend to use insurance as catastrophe cover, because they know that having insurance companies pay on a lot of small claims is expensive on average.
There is an exception to all of this.? If you are so rich as to need to stiff the taxman, buying cash value insurance policies can make a lot of sense.? In that case, wealthy actuaries with clever tax advisors buy cash value life insurance.? Death benefits do not pass through the estate.
Actuaries are generally conservative, and avoid insurance products that are not easily analyzed.? That should be true of most insurance buyers.
hi David, thanks for replying to me. I have something that i would like to follow up:
“Also, they tend to use insurance as catastrophe cover, because they know that having insurance companies pay on a lot of small claims is expensive on average.”
what do u mean by catastrophe cover? do you mean that those hospital policies or personal accident, travel insurance is worthless?
Thank you once again
What I mean is that actuaries don’t buy coverages with low deductibles, they buy high deductible coverages. I have never filed a claim against my P&C insurance companies.
Drizzt
A classic example is the deductible buyout for rental cars. The total sum exposed is finite and relatively low.
With suitable underwriting (read making sure that the dents and scrapes listed on the form match the car) your expected claim cost should be a small fraction of the daily charge.
If you can handle the volatility (i.e. what if you get hit with a charge the first time you decide not to buy out the deductible?) – and can aford the $1,000 deductible in the event of a collision, then not buying the cover can be very attractive.
Bear in mind too that there is an element of “convienence” embeded in many of these insurance purchases (and not always in the same way).
– buying out a collision deductible, you are potentially avoiding the hassle over whether a scrape of ding was in the car when you hired it
– buying a low deductible, you are buying cashflow smoothing (as a reader of David’s this should be a flag that you’re likely paying hansomely for cashflow smoothing!) but incurring a convience cost in making a claim for the small amounts
Peter
(as a P&C actuary, my thoughts on this are pretty similar to David’s)
hi peter,
thank you for explaining to me. so it means that for rental cars, if you can pay for a probable low expense you should insure only against the catastrophic ones.
should we factor in whether the incident is more probable?