Can YOU become self-insured?

June 13, 2017 | Andy Blandford

In simple terms, people need insurance because they haven’t accumulated sufficient assets and money to meet financial challenges in the event of a catastrophe. Where there are sufficient resources in place, they can choose to be partly or fully self-insured. People who argue that they cannot afford or don’t want insurance are by default ‘self-insured’; where their family and current resources carry the whole risk of catastrophe.

Your choices here are most often determined by your interpretation and awareness of risk. It is not viable for you to insure every scenario since the more you spend on insurance the less available for savings toward retirement and your family needs along the way. In my experience, the fundamental question and challenge here are identifying which risks to protect against and to what degree. Some risks you can self-insure whereas others you need to partly or fully ‘outsource’.

Measuring your self-insurance capacity is not as complicated as you might think it to be. Firstly, you should consider your existing liquid resources. For example, if your cash and fixed deposits in the bank are sufficient to last 3 or 6 months, then your family is domestically self-insured for that period. Of course, this simplistic calculation ignores medical or other incidental costs, but you can see the ‘picture’ here.

Next, you should consider your investments such as stocks, bonds and mutual funds for example. Converting these assets into cash will face trading, bank, and FX costs. There is also the matter of market cost in that if markets are down at the time of your catastrophe, you might be forced to accept material losses on your investments when you liquidate. These assets represent your ‘second-line of defence’.

Next are your fixed assets. How might these be accessed or liquidated should your first and second lines-of-defence prove insufficient. These can be real estate, private equity, artwork, antiques, motor vehicles, etc. This ‘fire-sale’ of illiquid assets takes time and often yields much less than you paid originally – especially if you are already running out of cash.

You now know what your self-insured capacity is and how long it likely can carry your family. Now you need to consider which risks you could outsource. Here, recognising and understanding your priorities becomes a critical element because it will be these that define and direct your choices going forward. Indeed, it may have taken you 10 or 20 years to accumulate the wealth that, upon full liquidation, might only last your family 3 or 4 years. After that, with little left, the family goals you previously had would become just a memory.  Upon such an outcome would this mean for example, that the private education you had previously invested into for your children is now curtailed? What about the expected funds for their university you had been setting aside? Would part or all your retirement funds now be gone too? Will you need to sell your home? These and many other implications need to be considered as you determine your choices.

The most common classes of ‘outsourced’ protection are life, income, critical illness, and medical assurances. Many clients will operate a combination of these as a contingency against catastrophe, operated as a bridge of protection as wealth expands through the coming years. As your wealth expands so does your self-insured capacity, enabling you to review and progressively scale down your protective needs. In turn, this can increase your allocations to wealth-building thereby accelerating funding for your financial wellbeing.

It is important to be pragmatic and objective when you balance wealth accumulation with your protective needs. Your financial adviser and counsellor can be quite valuable here because unlike you, he won’t be emotionally connected to your issues and obligations. If it is that your existing adviser or agent is too product focused then you may need to find an adviser who is experienced and pragmatic with the risks you face to deliver a holistic programme that can provide the scalable self-insured solution with your new risk awareness from today now demands…!

Do take the time to measure your self-insured capacity and consider this against the risks you already carry or outsource. Your findings will surprise you! If you are unsure of your conclusions or simply need to double-check, by all means, contact me.