Floods and fires bring home benefit of insurance

In eastern Australia, this January will be remembered for the devastation of property: homes, personal and business effects including large numbers of livestock, because of widespread bushfires and flooding. These events have cost both the individuals directly affected and their communities substantial amounts of money.

Having comprehensive insurance can help mitigate the costs and assist with the reparation process. However, many of the people and businesses affected have inadequate and, in some instances, no insurance. This forces them either to use their own cash reserves or to rely on help from governments.

While there’s talk that premiums may rise to compensate for such a calamitous month, the reality is that even if they do, the cost of insurance represents good value compared to not being fully protected.

Wealthy people may be able to absorb the risk of losses but few choose to do so for sensible reasons. The best insurance policy is one that for a reasonable annual premium covers the possibility of substantial loss.

The fact that the policy may not be claimed upon doesn’t mean that money paying the premium has been wasted.

The term insurance means precisely that: protection against risks that may eventuate. In some cases, such as for residents of low-lying or previously inundated areas, the case for comprehensive protection is overwhelming. In the rain-affected areas, significant damage was caused by high winds and falling trees. Even tenants not responsible for the premises in which they live or operate a business can suffer losses through damage to their contents.

Mortgage providers insist that owners take out comprehensive insurance of the property offered as collateral. But there is no such compulsion for tenants and outright owners of property to insure the replacement value of their property.

It may be all right for governments not to take out insurance and instead self-insure using the money that would have been paid as premiums to meet ongoing losses as and when they occur. But as we saw in the last Queensland floods the losses from self-insurance can be very large.

For individuals, when money is tight and there are competing commitments, the option of not insuring assets to their full value can appear attractive. But the impact on those affected by natural disasters can be devastating. To be faced with large bills when incomes are also affected by a catastrophe is not an experience worth consideration.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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