I’m round about that age (if not a little past it) when it comes time to take responsibility for all the additional extras that I’ve been avoiding. Like paying for income protection insurance. And regular visits to the dermatologist. And all those other things.

But I do spend a fair amount of time being sold extra insurance. I don’t always buy it. But I am always sold it.

Which begs the question: is it all really necessary?

Immaculate Conception Insurance, For Example

In the world of weird insurance policies, the name “Simon Burgess” keeps popping up. He and his wife Sara were the co-founders of British Insurance, an online insurance provider. Today, British Insurance is involved in fairly hum-drum insurance policies, probably because Simon is no longer involved. But in its day, British Insurance offered coverage to three women in Inverness for the costs of bringing up the Christ should they immaculately conceive Him in the Second Coming.

A quote from Simon*:
*I have no idea how valid this quote is – it comes from a web article that arose in the age of dial-up. But I did find a number of articles referencing these policies, so they’re verifiable at least!

“We insure virgins against immaculate conception, prostitutes against loss of earnings from headache and backache, conversion to a werewolf or vampire, death or serious injury through paranormal activity, and unfaithful husbands against having their penis cut off.”

You’d have to prove the above to claim though, which should make it a little difficult. Especially when the term “immaculate conception” does not actually refer to the conception of Christ, but rather to the manner in which the Virgin was conceived in her mother, St Elizabeth. But, you know, details. Whatever.

Although the company eventually suspended the £1 million Immaculate Conception policy after the Catholic Church complained.

Alien Abduction Insurance, For A Different Example

Goodfellow Rebecca Ingrams Pearson (GRIP) stopped offering Alien Abduction Insurance after the 39 cult members of Heaven’s Gate took out the policy, and then killed themselves a few weeks later in the hope that they could join the spaceship travelling in the wake of the Hale-Bopp comet.

Apparently, they have since decided to re-offer it.

The point is: insurance houses don’t judge you for being crazy. In fact, they have a deeply vested interest in actively supporting it. Go ahead, be paranoid, and they’ll charge you a premium to cover it.

But if they’re benefiting from your irrationality, then it means that you probably have insurance that you don’t need…

An Early History of Insurance

Life is full of risk. Some of those risks are potentially bankrupting. For example: if the risk of you developing cancer is realised, the cost of your treatment could be extreme.

If we all faced that possibility as individuals, then that would generally suck. Especially if you’re the one that ends up on the losing end of the odds.

However, what we all have in common is the fear that it can happen to us… which makes space for insurance.

In history, I think that you’d find that the first “insurance” policies were informal. When you got sick, your community/village/church would step in (hopefully) to help out and keep your family safe until you got better. With the unspoken quid pro quo being that you’re expected to help out should it happen to any of the others in your community.

It’s only a logical step from there to whole villages being helped out by other villages in the case of floods, famines, etc.

And eventually, someone entrepreneurial stood up and said “You know what, this would all be a lot easier if you would just put some communal money aside for that rainy day”.

How It’s Meant To Work, and Why It’s A Good Idea

The idea:

  1. Everyone should contribute some money every month into this central fund.
  2. When anyone that’s a member of the fund needs a payout, then we’ll give you the money.
  3. If you don’t pay in, then you won’t get anything paid out.
  4. If you defraud us, it’ll be the hanging, drawing and quartering end-of-the-story for you, my boy.

The logic behind it:

  1. Let’s say that it costs $120,000 to rebuild your house if it burns down.
  2. That’s a lot of money for one person to save (ie. to self-insure).
  3. But let’s assume that only one house in 100 will burn down every year.
  4. If 100 families club together, then they’d just have to come up with $120,000 annually between them.
  5. That’s $1,200 each per year. Or $100 per family per month.
  6. $100 per month? Rather than having to fork out $120,000 in the event of someone knocking over a candle?
  7. Sounds like a good deal.

Then the person in charge of the fund rapidly realised that there were homes, and there were homes. So he/she turned around and said: if you build your home right, and you install fire alarms, then the likelihood of your house being the one to burn down is a lot less than the home down the road. Especially as that homeowner has a penchant for open fires in the kitchen.

So they charged lower insurance premiums to the mindful, and higher insurance premiums to the couldn’t-careless (if they didn’t kick them out of the scheme altogether), which encouraged conscientious behaviour.

And almost everyone wins – because you’re reaping the benefit of being part of a community that helps each other out, and encourages good practice.

Where It All Goes Wrong

Insurance providers are meant to be brokers of risk. They take high-cost low-likelihood individual risks, and spread the high costs across the community so that everyone now has low-cost, low-likelihood individual risks.

Ideally, it’s meant to be for those events that are extremely difficult to self-insure against. And by “self-insure”, what I mean is “build up a sufficient level of savings that you could cover the loss if you had to”.

But today, it’s almost as though we’ve forgotten that we’re meant to be self-insuring. And that we can’t insure against everything, because we almost certainly can’t read all the fine-print.

So it’s time to re-think what insurance we have. And what insurance we ought to have. And what insurance we can dispense with.

And if you want that list, I’ve written about it here.

Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha. Also, check out the RA podcast on iTunes: The Story of Money.