Insurance - An Asset or Expense?
Have we been thinking of insurance the wrong way? Many think of insurance as an expense. In fact, accounting rules treat it as such. As consumers, we know insurance is not the most exciting product to buy and we don't always give it the thought it deserves. Expense-consciousness, whether coming from our own pockets or our businesses, can blind us from looking beyond the cheapest price available.
While insurance is accounted for as an expense, should we value it as an investment - as an asset that responds when something unforeseen happens, such as a fire, car crash or disability claim? When viewed as an asset, the quality of insurance becomes the focal point. After all, insurance is a promise to pay, in some cases, years or decades into the future. As with the purchase of any asset, cost is one consideration but value is equally important. Not all insurance is the same.
The switch in mindset, to thinking of insurance as buying an asset, leads us as consumers to shift our decision criteria when making that choice. We focus on the due diligence required to value that asset, particularly as regards the insurance company and its owners. Questions to ask include: Are the owners committed to the business? Does their investment time horizon mirror the duration of the liabilities they are assuming? Does the company have a strong balance sheet and top-tier ratings from the ratings agencies? Does the company have a proven track record of a willingness to pay claims in addition to the financial ability to pay them?
The most expensive insurance is insurance that doesn't perform when you need it. Thinking of insurance as an asset instead of simply as an expense can help change one's perspective and help make better long-term decisions. Bottom line: Not all insurance or reinsurance is the same.