moneyFYI
Financial Freedom Is Merely Organized Common Sense
You Cannot Know Cost By Asking Price
The attached piece is valuable. It outlines why something for nothing does not work in respect to insurance.
Tim O’Brien, a casualty insurance broker in Long Island, New York, wrote it for IRMI and sent it to me. Personal Risk Management: Go Beyond the Product Pitch.
If you sell insurance, or buy it either, you should read the article. It will likely take more than a few minutes to do so, but will be worth it. It makes several useful points and they matter regardless of the insurance product you may use. Fire, auto, life and disability are similar in that the insurer takes the risk away for a price. Only the cause of claim is different.
- If you buy, or sell, insurance on price alone you are doing a poor job.
- Know your goals (purpose.)
- Price does not indicate value
- Insurers write the policies. Pay attention to what they say. Words matter.
- All policies of a type are not the same in terms of what they cover.
- Insurance is not a commodity. Policy A is not necessarily a good substitute for policy B.
- The advisers must manage expectations. In the absence of meaning, clients will buy on price alone.
If you buy or sell a policy based primarily on price, be sure everyone understands this story.
You are flying cross country with the cheapest carrier. The pilot comes on the intercom and says the plane is going to crash, but not to worry the stewards will be renting parachutes.
A steward comes to you and says, “We have two kinds of parachutes. One rents for $100, the other for $50. Which would you like?”
Being smarter than about 80% of the people, you say, “What’s the difference?”
The steward replies, “The $50 ones are factory seconds and work about half the time. The $100 ones always work.”
Now which one do you want?
The moral. Price says nothing about what you are getting in return for your money. You must ask.
Value is what you get in exchange for cost. Price is one element of cost but not the only one. In the parachute example, cost is either $100 cash, or $50 cash plus acceptance of a 50% probability of untimely death.
If you do not know what element of value disappeared to make the price lower, you are not a capable buyer. Pay more attention.
Recall John Ruskin:
“There is hardly anything in the world that some man cannot make a little worse and sell a little cheaper, and the people who consider price only are this man’s lawful prey.”
Smart people seek optimal value, not necessarily lowest price.
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Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. Contact: don@moneyfyi.com
moneyFYI 
Awesome post. My new favorite quote on this subject, along with the words of sales legend Morty Seinfeld: “Cheap fabric and dim lighting, that’s how you move merchandise.” More info:
http://www.independentagent.com/Education/VU/Pages/featured-resources/Commodity/default.aspx
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