Insurance – An Explanatory Fable
Once upon a time, in a nice suburban neighborhood Mr. Adams decided to build a backyard playhouse for his children. He built a nice little wooden playhouse with a door, glass windows and a wooden floor. Mr. Adams paid $500 for materials and spent several hours on weekends and evenings building it. The Adams children loved the playhouse and played in it on most days. The other neighborhood children would also come over and play in the little wooden playhouse.
Soon the other neighborhood children began asking their parents for a playhouse in their backyard. It wasn’t long before Mrs. Baxter and Mr. Cain spent money for materials and invested weekend and evening hours to build playhouses for their children. Before long every neighborhood home with children had a playhouse in their backyard.
The Davidsons built a large playhouse with glass in the windows and a carpeted floor. The Fishers built a log cabin playhouse. Although it was a little smaller, it ended up costing them more than most of the plywood models. Ms. Green purchased a plastic playhouse and assembled it on a Sunday afternoon.
Mr. Harrison, who was an excellent carpenter, built a playhouse with fancy trim, window boxes and shutters. He even painted the playhouse to match his home. The Ingrams and Jiminez families built very plain playhouses, and the Knight’s playhouse was little more than a lean-to. But in each-and-every case the children all loved their playhouses.
Then one night during a storm a tree branch fell on the Adams’ playhouse and completely crushed it. Mr. Adams salvaged what he could from the debris and purchased new materials to rebuild the playhouse. Several of the other neighborhood parents came over to help and the damaged playhouse was rebuilt in a single weekend.
While they were working on the Adams’ playhouse Mrs. Baxter said, “this could have happened to any of our playhouses. We should come up with a plan where we agree to help each other out if something like this should happen again.”
Mr. Cain said, “That is a great idea. We could create a Playhouse Insurance Plan. Each family will contribute to a fund that can be used to pay for materials and repairs if this should happen again.” The other parents agreed it was a great idea, and several agreed to serve on a committee to come up with rules and a reasonable contribution amount.
A couple weeks later the committee met on the Cain’s back porch to discuss how the Playhouse Insurance Plan should work.
Mr. Adams reminded the committee that the recent repair to his playhouse cost $150 in new materials, but he hadn’t counted any labor since others had all chipped in to get it quickly rebuilt. Mr. Cain suggested that had they paid for labor it would have been another $150, and suggested that anyone who experienced a destroyed playhouse would be eligible for a payment of $300 from the Playhouse Insurance Plan to cover the repair costs. Mrs. Baxter quickly determined that 30 of the 50 homes in the neighborhood had a playhouse, and if each of those 30 homeowners would contribute $10 the Playhouse Insurance Plan would have the funds needed to pay for a playhouse to be rebuilt. They decided to bring the plan to all the homeowners at the upcoming community picnic.
At the picnic event, Mr. Cain and Mrs. Baxter presented the plan. They explained that they would collect $10 a year from each playhouse owner. This would essentially be the insurance premium each home would contribute. They determined that Mr. Matthews would be designated to keep the “premiums” which would total $300 (assuming everyone pays) and he would distribute the funds when a repair was needed.
Suddenly hands were raised. There were clearly a lot of questions and concerns.
Mr. Ingram asked, “What happens if the needed repairs to a damaged playhouse didn’t need a full $300?”. Mrs. Jimenez asked, “What if more than one playhouse is damaged?”
The committee huddled for a few minutes and came up with some answers. Mr. Cain said they should probably collect $30 dollars a year from each owner to cover the average cost of up to three damaged playhouses. “That should be sufficient, since it is unlikely that more than three playhouses would be damaged in any given year.” Mr. Fisher laughed and pointed out, “We’ve just had our first actuarial review and the resulting rate hike and we haven’t even agreed to participate yet.”
Mrs. Baxter also clarified that Mr. Matthews would reimburse only the actual cost of materials and labor needed and that any unused funds would remain reserved for future claims. Mr. Matthews then spoke up, “If this is going to require me to assess damages and process claims, I am going to want some clear guidelines of what should be covered.” He paused and then added, “Although I volunteered to hold and disburse the funds, if there are going to be more claims and value assessments, I think it is only fair that I receive some minimal compensation for my time and effort.” Mr. Fisher said, “Here we go with the administrative fees.” Everyone chuckled, but knew Mr. Matthews had a valid point—administrative work would be required.
Mr. Cain pointed out that some playhouses, like his own, were pretty simple, while others like the Davidson’s contained carpet and glass windows. He mentioned that restoring some damaged playhouses to their original condition may require more money than would be needed to restore others. “How will you handle that?” he asked. Mr. Fisher audibly groaned, “We are probably going to need a rates that vary based on potential need”, he said.
Mr. Knight mentioned that his playhouse had some termite damage and he had recently obtained an estimate of $150 for repairs. He pulled $30 from his wallet and said “Here is my premium payment, when can I get the $150 to make my repairs?”
Ms. Green quickly spoke up with two objections. Her first objection was that it wasn’t fair to all the other participants in the Plan because Mr. Knight’s issue occurred prior to there being an agreement or Plan in place. She said, “I don’t see Mr. Adams asking for reimbursement for the storm damage to his playhouse.” Mr. Fisher mumbled agreement and commented “I think that should be considered a pre-existing condition.”
Ms. Green also objected to covering termite damage in general. She pointed out that because her playhouse was made of plastic it would never have any termite damage. “If you are going to cover termite damage under this Plan then I should get a premium discount”, she complained.
Mr. Ingram said that he agreed with Ms. Green, but that there was also another factor to consider. He pointed out that termite damage could have been prevented by proactively treating the playhouse for termites, and the Plan shouldn’t cover such routine maintenance expenses.
Several others argued that they had already done some maintenance on their playhouses, mentioning how they regularly cleaned, painted and made minor repairs so as to avoid major repairs later. Mr. Jimenez suggested that applying a deductible of $100 would be fair for those that did preventive maintenance work since it would require those that weren’t as proactive to have some "Skin in the Game”. But others argued that approach might encourage those already doing preventive maintenance to stop since the $100 deductible would also apply to them even though they were already investing in maintenance. Some others suggested that the deductible might cause some not to make, or to delay making, a claim. Mrs. Baxter added, “The result could be unsafe and unsightly playhouses, and more costly claims later.”
Mr. Fisher, somewhat tongue in cheek, suggested an opposite approach. Maybe everyone should be provided with some funds from the Plan for ‘preventive care’ so that there would be no barriers to performing basic maintenance.” Mr. Matthews suggested that would surely increase the number of claims he would need to review. He added “and do you really want me to confirm that appropriate preventive maintenance had been performed before making a claims payment?”
Mrs. Jimenez suggested “Maybe we should only cover storm damage or similar uncontrollable catastrophes. I am not sure damage from routine or anticipated issues should be covered. Maybe we should only cover damage that exceeds a much higher level, like $500.” At that point Mr. Fisher added “Well now we have a high-deductible plan to consider. If someone suggests an out-of-pocket maximum we are going to need another actuarial review.”
Mr. Lawson, who regularly had a beef with Mr. Matthews over his “use of that annoying gas-powered leaf blower instead of quietly raking his leaves”, used the break in the conversation to interject “I am not sure I want Mr. Matthews to be in the role of Playhouse Insurance Plan czar.”
Mr. Matthews became visibly irritated by the ‘czar’ comment and fired back, “Hey, I volunteered for this role, but if you think you can do a better job monitoring claims, please step up!”
Seeing an opportunity to change direction of the conversation, as well as perhaps eliminate a new premium payment to his budget, Mr. Knight suggested “Since the neighborhood already has a Home Owners Association to keep the neighborhood looking nice, and since we already pay them a hefty amount of dues, maybe playhouses repairs should be covered out of that existing budget. Mr. Fisher rolled his eyes and said, “That sounds like ‘socialized playhouse insurance’ if you ask me.”
Mr. Nichols, the HOA president, jumped in, “The HOA Board would probably have to raise dues to cover any such expenses. Besides, no one would support HOA funds paying for upkeep and repairs on our individual homes; why shouldn’t each homeowner be responsible for their own playhouse.”
At that point, empty nester Mr. Owens, who didn’t have a playhouse, angrily objected, “There is no way I will support higher HOA dues to provide services that would not benefit approximately 40% of the homeowners! Furthermore, I will actively campaign against re-electing any HOA Board Member who would support such a notion!”
That comment ignited further whispering and comments as various factions sought out like-minded neighbors to support their position.
It was at that point that Mrs. Adams wisely spoke up, “Hey everyone, we should calm down and give this some further thought and discussion. I don’t think any of us anticipated that implementing a Playhouse Insurance Plan would be so complicated, or spark so many different ideas and opinions. Besides, this is supposed to be a friendly neighborhood picnic and the lemonade is getting warm, and the burgers are getting cold. Let’s take a break and eat.”
The entire neighborhood saw the logic in that statement. Besides, stomachs were growling, and being hungry wasn’t going to help everyone come to agreement.
The conversation quickly shifted to a more cordial tone as the neighbors lined up by the serving table and began to load their paper plates with food.
While Mr. Powell, owner of the local hardware store, waited his turn in line, he thought to himself. “I sold Mr. Adams the materials he needed to repair his crushed playhouse at a steep discount because it was the neighborly thing to do. But if the playhouse owners are going to be getting financial support from a Playhouse Insurance Plan or from the HOA coffers, I am going to charge full price the next time someone comes in for repair materials”. He scratched his head and thought, “and it is probably time for a price increase on paint and termite spray.”
Conclusion
This was a fun story to write, and hopefully for you to read. The objective was to provide a better understanding of the challenges behind providing any type of insurance coverage.
Written by Brian Mitchell
Brian Mitchell has experience leading Total Rewards strategy and implementation for large employers.
Benefit Boosts by Brian Mitchell© – Vol 2024-009
You may also like these articles:
