Transfer your risks to insurers

By Dan Costello

CEO of AIA Life Korea

An insurance company’s key responsibility is to accept individual risks, put the risks together in a “pool” and then manage the risks. So why is this fact important to you? It’s important to you because a large insurer with significant financial assets, a big customer base, and expert risk management is able to absorb financial risks, and, you, as an individual consumer, should take advantage of this resource to transfer your individual risks to an insurance company. If you do it, you may rest easier each night. Now that’s a “no-risk” offer!

So how does this work? Let’s take a very simple example: If, on average, one person in one hundred will experience a final loss of 100 million won, there are two ways for the individual to handle this risk of loss: 1) hope it doesn’t happen to him or her; or 2) pass the risk to an insurer for a “premium” or cost.

So, for a cost, the individual can get rid of the risk. Let’s say the cost, or “premium” to transfer the risk to an insurer is 1.1 million won. Is it worth it to pay 1.1 million won to transfer a risk of 100 million won? Unfortunately, some people don’t think so, and IF that risk happens to the individual, it could cause financial ruin.

If the individual decides to transfer the risk, the insurer’s job is to find 99 other people who want to transfer the risk for 1.1 million won, collect 110 million won in premium, and then pay the claim to the one person who experiences the 100 million won loss.

This is a classic “win-win” scenario. The individuals transfer their risk at a price they can afford, and rest easy each night with no risk. The one individual who actually experiences the loss, has his loss paid by the company and avoids financial ruin.

So what are these risks? For a life insurance company, the risks we help people manage are the financial losses that can result from early death, a disability, medical expenses from a serious illness, or the risk of outliving one’s retirement savings. These are significant risks that we each face, and we may not be able to avoid them, but we definitely can avoid the financial loss from these risks.

In Korea, a very advanced economy, we still have a lot of work to do to insure more people. For example, only 37 percent of adult Koreans have insurance with a death benefit. Of those 37%, the average policy size is only 56 million won.

Is 56 million won enough money to cover a family of three’s expenses for 10 years or more? Medical expenses are also significantly underinsured here. The average policy size is about 14 million won; while the average cost of serious illness is more than double that amount.

There are many more facts that can be quoted to show how much more we need to do to properly insure ourselves against major financial losses, but the important point is this: Take a little time to really think about the financial risks you face, and then consider transferring these financial risks to an insurance company. If you decide to do it, you may just sleep a little better each night.