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insurance is important

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Recently many parts of England have been affected by flooding. Many people have had to be evacuated from their homes.

I was watching the news the other day where they did a report on some of the afflicted returning to their homes and surveying the damage. I honestly felt for these people as pretty much all their possessions were trashed.

In one of the areas, they’d previously had a major flood before. Apparently, some of the residents had been told that such a flood was a once in a hundred years event and since they’d had one already they cancelled their insurance thinking that it was too rare to happen again. Ignoring the possibility that the climate is changing or that the odds were incorrect in the first place, they’ve been looking at it all wrong. Its not really how likely it is to happen, its how much damage it will do if it does.

I bet they cancelled the insurance because the premiums went up. The thing is though, that the premium will only go up if there is increased risk i.e. the chance of the event happening has increased or the cost of fixing it has increased. To me, this means that your need for insurance is greater not less.

The lesson for everyone should be that if you live in a floodplain you need insurance against catastrophic floods. Anything catastrophic that has a small chance of happening probably needs to be insured against.

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2 comments for “insurance is important”

  1. I guess those people that cancelled their policies don’t understand a basic rule of statistics:

    Even if the odds are correct and the chance of a flood is 1:100 is correct, the fact that a flood happened this year, in no way reduced the chance that one will happen again the very next year. Those two occurances are independent. The chance of a one hundred year flood in any given year, it 1:100. Think of it as rolling a 100 side die…

    Posted by Shadox | July 1, 2007, 2:51 am
  2. That is indeed true. People have a tendency to think that a 1 in 100 year chance means that if it has happened once, it will not happen again for at least 70-80 years.

    Many people don’t understand basic rules of probability and statistics.

    Posted by plonkee | July 2, 2007, 8:29 am

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