An insurance anomally
The question of insurance of insurance has occupied my mind a lot in the last few months – but it’s been mainly a routine matter so I haven’t thought of commenting on it here.
Routine? – yes, our policies were due for renewal in July so I spent time in June putting the proposal forms together and submitting them to the insurance company. (I have to submit them well in advance because they need time to arrange for reinsurance in London.) Although the answers to most of the questions on the form are the same each year, some need to be checked and updated … it takes time … but it’s routine.
The question of insurance is sometimes raised by clients … for example, foreign tour companies ask us for details of our coverage, if our hotels have fire certificates, and so on. Sometimes. tourists timidly ask, ” … if something goes wrong, what happens?, what insurance cover do you have?” I am far from offended by these questions … on the contrary, I am glad to get them because they show that the clients are being sensible and thinking about such things.
Our insurance, however, is one thing … they also need insurance. Our insurance covers our responsibility and liability … but that’s not the whole story.
Under Kyrgyz law they have to have have insurance to cover the cost of medical and other emergency expenses incurred whilst they are here. We normally recommend that clients take out a comprehensive travel insurance policy that has provisions for emergency evacuation if necessary, things like delays and cancellations, the loss of documents (like passports and flight tickets …), and possessions, (whether stolen or simply lost) and so on … and that they check the terms of the policy to ensure that it covers Kyrgyzstan and any activities that they might undertake – horse riding, rafting, helicopter flights, mountain climbing, skiing, etc. … ).
As the British Foreign and Commonwealth Office says: If you can’t afford the insurance, you can’t afford to go!”
Some of my staff think that the cost of insurance is tremendously expensive, and they ask why we take out insurance policies … “Nobody else does …” (which is not true, but I can understand why they have this impression), “and insurance companies never pay out” – (which is also not true, but I can understand why they have this impression), “and if they do then they pay out peanuts”, (which, once more, is not necessarily true … although I can see some justification for the view).
The problem is that they don’t really understand insurance … and that’s not really surprising because they don’t really have much exposure to insurance here. It’s a concept that most people have heard of – but have no experience of in practice, so their opinions are based on impressions and hearsay. At the moment, for example, there is no compulsory insurance in Kyrgyzstan except for the insurance that the government has, by law, to provide for members of the military in service. There have been attempts to introduce several forms of compulsory insurance – for the owners/drivers of vehicles, for employers engaged in dangerous activities such as conveying dangerous goods … and so on. At the moment, however, although some laws have been passed, they have not been put into effect and are inoperative.
There is also, the Social Fund, (Social Security), which is a form of insurance, that is designed to provide assistance in the event of someone falling ill or becoming unemployed as well as a pension … but then the benefits are so tied down with restrictions and are so small that it is easy to see that if this is their only exposure to insurance, why they think it is a waste of money.
Anyway, in reply, I normally do something that I don’t like doing … I simply say say: “We, (the investors), think it is important – so we are doing it.” That usually settles the matter … but I can tell that they wonder why we, in their opinion, “cast so much money into the wind”. I would really like to explain why we think it it is important. My attitude, for example, to insurance is rather like that towards the police, doctors and lawyers. You hope that you will never need them … but if and when you do need them, then you are really glad that they are there. It helps to spread the risk of unforeseen and unplanned expenses arising out of unforeseen and unplanned events … it gives reassurance to clients that if there is a problem, (earthquake, fire, accident, theft, …) then they won’t be left alone and helpless to try and sort things out – and, especially, that they will have assistance in meeting what might be a heavy financial cost as a result.
The insurance companies take the proposal form and based on the information provided and experience they work out the probability of a particular event occurring and and the cost of providing assistance … then they add their administrative costs, a commission (so that they make a profit … after all, they are a business) and any tax liabilities that arise … and on this they calculate the premium which the client must pay. Usually, the premium is added to the other premium’s received for other policies and invested to provide a regular source of income which can be used to meet any claims which are received.
Meeting claims is, of course, an expense to the insurance company … and any business has to keep a careful eye on both it’s income and expenses. It needs to increase the first and decrease the second as much as is practically possible. It would be wrong … indeed, it would be irresponsible, for an insurance company to overexpose itself to any particular risk and so they try to be specific about what they will cover and what expenses they will meet. Another, less sympathetic, way of looking at it is that they limit the risk of their exposure to incur potential expenditure by ringing the policy with numerous conditions and warranties. That’s why it is essential to read the documentation carefully – to know what is, or is not, covered by the policy … what the premium that is paid is actually buying.
If an event occurs which should be covered by the policy then they check that it falls within these conditions and that none of the warranties has been broken, before deciding that it is an “insured” event. Unfortunately, the declaration that something was not an “insured event” helps to feed the impression that “insurance companies never pay out” … and this is further reinforced when even if it is agreed that it is covered by the policy, then the insurance company insists on further conditions, have complicated claims procedures or delay payment.
The amount that is paid out by the insurance company will depend on several factors: the amount of cover provide for by the policy … provide the sum falls within the limits set by the agreed level of cover then it should be met in full, (minus any “excess”). The level of cover required is a question which vexes me every year … I actually want a high level of cover, even if that means a higher premium because, if the limit of cover agreed in the policy is too low, then the insured, (me), is still going to be left with a substantial bill for costs … and unfortunately many policies come with a relatively low level of cover.
On one occasion I was in a meeting when someone, (who happens to run an insurance company), proposed that Kyrgyzstan institute a system of compulsory insurance for tour companies. I, (who run a tour company), surprised everyone when I “hit the roof”. It’s not that I am opposed to insurance – we have insurance … and I want everyone to have insurance … but it seemed to me that there are much more obvious situations for starting to introduce compulsory insurance … “let’s start,” I said, “with drivers.”
The problem is that motor insurance here is voluntary.
I remember going to pick up some paperwork for one of our vehicles and waiting in line with loads of other people. They seemed to be quite efficient, and the queue was moving forward but suddenly it stopped … and a row erupted, (so I am not the only argumentative person in Kyrgyzstan). It got so heated that the captain of police emerged from his office and asked what the kafuffle was all about. “She won’t give me my documents unless I buy an insurance policy” the irate customer explained. “It’s not expensive and it’s a good thing” the captain replied. “But it’s voluntary … and I don’t want it … I want my documents … she has no right to force me to buy insurance” was the retort. The captain agreed … “He doesn’t have to buy insurance … give him his documents”, he instructed.
It was the first time I had met this situation and I was astounded. A vehicle is a potentially lethal machine … even if it doesn’t kill someone, they can be seriously injured. Even if no-one is hurt, then it can cause serious material damage. Paying compensation, and paying for repairs to vehicles, walls, buildings etc. can place an unbearable burden on drivers … and so it seemed extremely unwise not to take out the policy.
Indeed, I grew up in a society where it is illegal to drive without insurance, and as a result I am all for compulsory insurance for drivers. I am pleased to say that Kyrgyzstan has passed legislation for such a system – but it has not yet been put into force because there are problems with establishing a workable system.
We do insure our vehicles … and we have arranged cover for them to be extended throughout the CIS countries because, sometimes, they cross the border into Kazakhstan … and, occasionally, beyond.
Now, Kazakhstan has a legal requirement for drivers to be insured and at roadside police checks, it is always one of the things that the traffic police ask about. As soon as you cross the border from Kyrgyzstan, there is a post where you can buy insurance. Our drivers carry a copy of our certificate of insurance and so don’t bother. Whenever they have been stopped at a checkpost and asked for their insurance, they have produced their certificate and there has been no trouble … until last week, that is.
The inspector looked at the document and said, “this won’t do.” “Why not?”, he was asked. “It doesn’t cover Kazakhstan”, he said. So, the driver pointed to the place where it said that it covered all countries in the CIS. “Yes, but it’s a Kyrgyz policy”, he said, “if it had been from a Kazakh company, it would be OK … “. There followed a long discussion with phone calls back and forward and eventually the driver was allowed on his way. We are looking into it further but, as far as I can tell, the inspector was wrong … the policy covered Kazakhstan and Kazakh law allows for foreign policies to operate in Kazakhstan if the vehicle is in the country for a limited time.
It was while we were dealing with this question that I was told about the experience of one driver with Kazakh motor insurance.
Because he didn’t have insurance, once he crossed the border he stopped and purchased a policy, got back in his vehicle and drove off. After less than a kilometer he was flagged down by a police officer, who asked for his documents. Taking the insurance policy, the officer scanned it carefully … first one side of the paper … and then the other. “You have a problem,” he said. On one side of the document it recorded when the policy was purchased and, in other another place, when the money was received by the agent – and in both places it had that day’s date. On the reverse side, however, it gave the date when the policy became effective … which was then next day!
In other words, the driver had purchased the policy as required by Kazakh law … but as it didn’t become effective until the next day, he had no insurance cover on that first day … and hence had no right to drive in Kazakhstan on that day. He was breaking the law … not through any fault of his (apart from, perhaps, not carefully reading the document, “the small print”, when he received it), but either because of a mistake on the part of the clerk who put the wrong date on the reverse side of the policy … or as a result of an anomaly in the system if it is required that the policy only becomes effective on the day after it has been purchased … or, … well I could be less than generous and speculate about other possibilities.
I won’t speculate, however, because, to be frank, the whole account is hearsay. I don’t know what actually happened … I wasn’t there …
Bishkek