Insurance is mandatory if you have a car!

If your car is worth insuring what about other assets ? What about your practice? Your Dentist’s chair? Your hospital?

Most doctors need at least some insurance to be in place as part of their overall financial plan.

The question is how do you work out what insurances you need, how much and what for?

And which is your most valuable asset?  If you have insured your house, car, your life, should you not have some insurance for your medical needs and your life too?

Think through what would happen to even the best laid financial plan if the doctor, at age 40, suffered a health trauma and was not able to work again. It would not matter what other strategies had been put in place, almost certainly the plan will fail and the doctor, and his or her family, would be in dire financial straits. Barring generous relatives, the financial future would look dim indeed. On the other hand, insurances are a bet you are most likely to lose.  The insured, i.e. the doctor, pays a premium to the insurer (the insurance company) in return for the insurer promising to pay an agreed amount to the insured if a specified event occurs. The process of the insurance company considering the risk and evaluating the risk is called “underwriting”, then the pricing is arrived at by the “actuaries”. The “price” so arrived at is called “premium” – which is a risk transfer fee. The probabilities are that the specified event will not occur. And the premium is calculated to be sufficient to pay out to those insured who do suffer the event, cover the insurer’s administration and selling costs, and then leave a profit for the insurer. Most of the insureds will end up paying more in premiums than they will receive back as benefits.

That is, most of the insureds will lose the bet. And I guess we are all happy losing this bet!

So some balance is needed when considering insurances. The advisors tend to be salesmen who talk up the need for insurance and the sums that should be insured. It is not uncommon for doctors to be over-insured and wasting money.

The key steps when evaluating any insurance proposal are:

(i) Identify the risk, i.e. what is the event you wish to insure against? – It could be theft, illness, disablement, death, malpractice suit, etc.

(ii) Ask what is the probability of that event occurring? – the probability of illness is far greater than death, hence a critical illness insurance which covers say 20 diseases will cost much more than a pure death (or life!) insurance

(iii) Ask what are the economic consequences of the insured event occurring? The cost of losing a mobile is negligible whereas the cost of a dentist’s chair breaking down could be much higher and more critical.

(iv) Ask what is the proposed cost of insuring against that risk and those consequences?  And

(v) To then decide if the cost worth the benefit?

This is the most difficult part. Most people do not know the cost of their family being on the roads if they are not around. Hence they think the premium being asked for is high. Only when you know the cost of “not having” a product can you compare the cost of “having” that product. A competent financial planner will guide a doctor through these key steps as part of your financial planning process. This requires a consideration of a many subjective factors and attitudes.

But it all gets down to risk management: understanding risk and being comfortable with it. Indeed a financial planner has to consider risk management when preparing a financial plan for a doctor.

This is so even if the doctor has asked the planner not to: the plan should on its face contain a statement that risk management advice has been declined. This is because a financial planner can be negligent and in breach of contract if they fail to advise on insurances.

What should the sum insured be? A basic principle in insurance is that the sum insured must be connected to the expected loss from the insured event occurring.