Seth’s Blog on Finance

Diversify Your Insurance Portfolio

Insurance is a tool people use to transfer financial risks to an insurance company. Someone who purchases insurance to reduce his financial risks should logically then go one more step to further reduce the chance of an unlikely event causing him financial troubles.

Thus, it is worth diversifying one’s insurance portfolio where practical. Placing insurance policies with different insurers ensure that a person’s entire financial portfolio is not in jeopardy should one insurer collapses. While there are regulatory measures in place to protect policyowners in such an event, they are still under tweaking and remain untested. It is still prudent that one takes necessary caution not to put all of his insurance policies with a single insurer.

It is notable that different insurers usually excel in different policy types, i.e. Company A may have a very competitive hospitalisation policy whereas Company B provides the best term rates. Thus, it is fortunate that a financial portfolio designed to contain best-of-class financial products from different insurers already serves to diversify one’s insurance portfolio.

Even within a single class of coverage, it may be worthwhile splitting up a large policy into smaller ones. For example, John may require a sizeable $500,000 of death coverage to provide for his wife and children should he pass away prematurely, or perhaps $500,000 in critical illness coverage in the event he suffers a major illness. Instead of purchasing a single policy which covers this relatively big amount, he can opt to split it into multiple policies with different insurers to diversify his risks.

This gives him a few practical advantages.

While insurers in Singapore share the same definitions of critical illnesses, they only cover 30 out of the 37 defined by the Life Insurance Association of Singapore. What this means is that an insurance policy may not cover certain critical illnesses. Thus, for a greater peace of mind and more comprehensive coverage against critical illnesses, John should split his insurance coverage between at least two companies.

Furthermore, while insurers pay out upon the definition of the critical illness being diagnosed in the insured, there can be situations whereby the insured may not fully satisfy the criteria. Whether or not a payout will happen depends on the insurer’s discretion and goodwill. By placing all his coverage with one company, John places his fate in a single insurer’s hands and runs the risk of getting no payout. Diversifying his policies reduces the chance that he gets nothing at all – some insurers do pay a claim ex gratia despite not having a legal obligation to do so. Hypothetically, the insurer which does not pay John might feel compelled to do so if John manages to receive a payout from a competing insurer for the sake of reputation. Such is the importance of not letting a single insurer gain too much power over yourself.

In fact, applying for insurance cover with multiple insurers benefits John right from the start. If he is not in the best of health, he is able to apply for insurance with different insurers and see which companies offer the best terms, thereafter placing his business with insurers that give him the most favourable terms.

The downside is that diversifying comes with a little added cost as insurers usually give a slight discount for larger single policies. One has to weigh this added bit of cost into consideration when doing so. It also means a little more work which is nothing compared to the grief one might suffer if he places all his insurance with one company and it does not work out well. Besides, sorting out this work is part of what you are paying your financial adviser for.

An important function of purchasing insurance is not just for transferring one’s risk, but also for a peace of mind. There is no peace of mind to be said if all of one’s insurance is with a single insurer, no matter how large or supposedly stable that company is. In light of recent events, it is clear that even big corporations are not infallible. Do the wise thing and play it safe.