Burn Baby Burn: When Insurance Is Worth It

I can see the smoke from Devonport as I cross the harbour. By the time I get to work, it’s hanging around the 26^th floor of the PwC building.

When I walk south at lunchtime, the scent is dreadful. Toxic and dark. Not of wood or natural material but something artificial.

Stocks in SkyCity [NZX:SKC] and Fletcher Building [NZX:FBU] were down around 3% while we waited for the insurance position on the burning International Convention Centre near the Sky Tower to be clarified.

We now know there is insurance coverage — but not the extent of that coverage or the time frame for an assessment.

Worth buying?

SkyCity is not a stock that has made my radar. There’s a question I apply to all portfolio holdings: ‘Does this business improve the world in some way?’ I’m not sure casino operation does.

Even if you could convince yourself, on balance, that SkyCity added more benefit than social problems, there’s the remaining question of an ambitious P/E — around 16 at the time of writing.

Fletcher Building, however, is on my radar. Building firms add value to this country.

It looks to be a good buy by book value. But then its P/E is also high for a building firm — at around 24 at this moment.

The business has struggled to achieve decent returns on capital. And there’s concern around the sustainability of property prices in Auckland.

Why buy a building company — even potentially a good one at a P/E of 24 — when you can access such companies in other larger markets at sharper prices?

But like a lot of assets in a small market and exchange, limited choice can mean higher prices.

Maintenance and growth of these share prices now depends on one thing: insurance assistance to plug the potential loss of a $700m building.

Weighing up the pros and cons of insurance

As I walk back through the smoky city, I reflect on the importance of insurance — not only for listed businesses, but to protect the wealth of us all. 

Your insurance matters for your home as much as anything else in life (health insurance, for example, is another must). With the right home insurance, you can protect your home from disaster and you can get the recommendation that you need from a public adjuster who can help you out should a disaster strike. From natural disasters to property damage, you shouldn’t have to wait too long for someone to come to your home and help you with a payout. Research your home insurance options — it’s important for when life takes that nasty turn.

Of course, not all insurance is worth it — especially when you can already cover the risk of loss without significantly damaging your net worth.

My assessment

In the UK, Payment Protection Insurance (PPI) has come under fire for either being mis-sold by banks or offering little real benefit.

PPI is meant to cover repayment of loans if you fall ill or lose your job. Often, the policies provide limited coverage or are very difficult to claim on. Meanwhile, they add 20% or more to the cost of loans.

The rule of thumb I use in assessing the value of insurance comes down to a simple question: ‘Could the set of events I’m seeking to insure against wipe out 10% or more of my net worth?’

For most people, home insurance, motor-vehicle liability and possibly the life and income of the breadwinner may fall within this question.

Should you take up health insurance?

One area people often wonder about is health insurance.

First up, it’s very hard for a healthy person to assess their risk. Should they have any existing conditions before taking out health insurance — these may not be covered anyway.

And there’s much you can do to mitigate your risk. Avoid smoking. Be sociable and connect with others. Don’t drink too much.

Second, it’s also very hard to project the likely cost if something goes wrong.

For serious or life-threatening emergencies, you’ll most likely be well-covered in the public system here in New Zealand. There’s little to no direct cost with that.

In the case of an accident, there’s probably coverage from the ACC system.

The risk event is that you need elective surgery. There’s a long waiting list.

Or you can’t access the quality of treatment, the drugs or timely follow-up that would ideally prolong your life.

How to consider your health insurance options

According to Southern Cross, medical procedures in New Zealand range from a few hundred dollars to around $80,000.

So a worst-case scenario of 80k? Acute incidents and accidents mostly covered by the public system and ACC? Maybe it’s not a net-worth breaker?

You need to consider that once your health takes a turn for the worse, you may not be confined to just one procedure.

I came across one person who had cancer. They were insured 4 years prior. And thus far, they have received over $150,000 for a range of cancer treatments.

When assessing risk, you need to consider the full extent of risk that you’re exposed to.

What are the different scenarios to consider?

Serious conditions and ongoing elective treatments could well run into hundreds of thousands of dollars.

Then, when it comes to health, it’s not just any asset. It’s the most important asset you have.  And there are emotional and timing factors involved when you become sick.

• Can I access treatment promptly?
• What if I have to stop working and lose my income?
• Do I want to be in a private hospital environment or a public one?
• What happens if ill health strikes me when my ‘self-insurance’ funds in the stock market are sitting at a low point?
• Will I have the time or energy to wait for the treatment options when an insurer could automatically refer me to their provider?

The decision on whether to self-insure or obtain health insurance will depend on your personal situation and feeling.

One thing is certain: if you opt in early, before the development of any conditions, your coverage is likely to be wider.

What happens when you get older?

But as you age, the premiums get more and more expensive.

My own view is that for investors with a reasonable net worth, health insurance could be beneficial at the margins. For example, using an economic policy with an excess to protect against the highest cost surgical areas like cancer or major operations.

It’s sort of like covering against your home burning down — but not day to day damage or repairs.

We touched on this in a previous post — How to Invest for Life.

There’s a quote I like, which is useful when considering any insurance. It goes like this:

‘Would you agree that the only person who can take care of the older person you will someday be — is the younger person you are now?’

Chance always favours the prepared. In whatever way they’ve prepared.

What about the concept of self-insurance?

Investors can significantly fund their own insurance policy.

Pharmaceutical and insurance businesses are poised for growth as our population ages.

In my Lifetime Wealth Investor research, I’m looking into a couple of picks in these industries that pay dividends of up to 8% per annum and may have capital growth upside.

One possibility could be to fund insurance premiums from dividend income. Not inconceivable, but very useful.

And now the view is clearer. The fire at SkyCity seems under control.

Now the insurance work will commence on all fronts. The dice at the casino continue to roll. And once again money may save some things but not all.

Regards,

Simon Angelo

Editor, WealthMorning.com

This article is general in nature and does not consider any particular situation. Please consult an Authorised Financial Adviser should you require personalised advice. For more personal finance articles, please visit Wealth Morning Personal Finance News