Tuesday, 15 September 2009

My big mistake - my first attempt at self-insurance

By Eilleen
Consumption Rebellion

Hello everyone,

Readers of my personal blog will know that I am currently on a drive to re-building my nest egg. See, I once had a very healthy nest egg until about 3 months ago...and then I lost 90% of that nest egg.

I lost it as a result of a frugal mistake - a very poor attempt at self-insurance...

Have you ever wondered if it was worth insuring? I have. Especially car insurance.

As a bit of a background - here in Australia, we have compulsory third party insurance. This insurance covers any costs incurred by a person who may have been injured or died as a result of my negligent driving. While this insurance is good, it does NOT cover damage to vehicles. For that I would need additional cover - for many Australians this additional cover takes the form of "comprehensive insurance". This would cover damage to vehicles, tow truck etc etc.

Now, I've been on the road for 16 years now and I've never had to claim against my comprehensive insurance. For 16 years, I drove and paid for comprehensive car insurance and wondered...what if I just put money aside instead of paying insurance?

Then in recent months, with so much going on in my personal and work life, I just let it...lapse. I set aside the money for comprehensive car insurance in my "nest egg" account and forgot all about it, fully expecting that nothing would happen (as nothing happened in 16 years).

And of course, it did. Three months ago, I hit another car. It was dark and raining heavily. Three cars ahead of us, one of the cars suddenly braked (not sure why). I was behind another car and didn't really see it happening. All I know is that suddenly the car in front of me touched his brakes then swerved wildly on to the large median strip in the middle of the road. I panicked and hit my brakes *hard*. Bad move. This just 'caused my car to lock up in the wet weather and I slid out of control and into another car.

No one was injured - thank goodness. However, the damage to my car (above) was over $3,000. The damage to the other car (which I was fully liable for) was about same.

Now if I recalculated my car insurance. If I had continued to pay car insurance - to date, I would have paid the insurance company $8,000. So *if* I had not paid the insurance company, and saved the money I would have $8,000 in the bank. But of course, I don't. I only stopped paying car insurance this year...

So what were my mistakes (aside from the driving mistake of hitting brakes hard in wet weather)?

I did not think through my venture into self-insuring. I just approached self-insurance from a "savings" point of view and did not think about the risks involved with it. Darren from Green Change commented on my post about the accident and succinctly gave me the direction I needed to have in approaching self-insurance:

"insure against the things that can wipe you out financially"

While my first attempt at self-insuring did not exactly wipe me out - it did take out 90% of my nest egg. I was lucky - it could've been much much worse. I shudder to think what could have happened had I not had the nest egg to begin with. I shudder to think what could have happened had I hit a luxury car.

So what am I doing now?

With Darren's advice in mind, I've now thought through my approach to self-insuring my car.
  • I have chosen to take out third-party property damage insurance rather than comprehensive insurance. My car is a very common model - parts are easy to get, as well as quite reasonable in costs. I can afford to repair my car BUT its another story with others' car/s or property. Third party property damage covers the cost of any property damage I may cause to others as a result of my negligent driving.
  • I decided to lower my insurance premium by increasing my minimum claim threshold (known as 'excess' here in Australia) to $1,000 instead of $500. Given my savings patterns, its almost certain that I would be able to pay $1,000 towards my claim in the event of an accident.
  • I have decided to take advance driving lessons. While this doesn't lower my insurance premium in any way, it does (at least in my mind) lessen the chances of me making the same driving mistake again.
So those are my lessons for self-insuring. I have now also reviewed my house and contents insurance. I have increased the insured amount for the house but lowered the amount for contents. I have realised that I can repair or source second-hand most household items myself. I have also raised my excess for that too.

In response to my changes in insurance, I have also increased the amount I put aside for my savings.

In short, I am now partially self-insuring. I am insured for things that can wipe me out financially but not for things I can repair, easily replace or even just do without.

As for my nest egg? Well, I'm also slowly re-building that. To date, I have recouped 25% of the original amount. I have more plans for rebuilding my nest egg but that's a story for another day.

How about you? Do you self-insure? What is your approach to self-insurance?