Understanding risk in general insurance: Are you covering the big losses, the little ones, or both?

When it comes to general insurance, one of the most important questions to ask is not simply, “How much will the premium cost?” but rather, “What level of risk am I comfortable carrying myself?”

Whether you are insuring a motor vehicle, home, contents, investment property or business, insurance is ultimately about transferring financial risk. You pay a premium so that, if something unexpected happens, you are not left carrying the full cost alone. But not every policy is designed the same way, and not every person has the same attitude to risk.

A key part of understanding insurance is deciding whether you are mainly trying to protect yourself against the big losses, the little ones, or both.

For example, a major house fire, a serious car accident, storm damage, theft, machinery breakdown, public liability claim or business interruption event could create a significant financial loss. These are the types of risks most people would struggle to absorb without insurance. For many, this is the core purpose of cover: protecting against the large, unexpected events that could seriously affect their financial position.

But smaller losses also matter. A cracked windscreen, minor vehicle damage, damaged personal items, accidental breakage at home, or a small business equipment claim may not be financially devastating, but they can still be frustrating and costly. This is where your attitude to risk becomes important.

One common example is the excess on an insurance policy.

An excess is the amount you agree to contribute towards a claim before the insurer pays the remaining eligible amount. For example, if your car insurance policy has a $1,000 excess and you make a claim for $5,000 of damage, you would generally pay the first $1,000 and the insurer would cover the balance, subject to the policy terms and conditions.

In many cases, you may have the option to increase or reduce your excess. A higher excess can sometimes reduce your premium, because you are agreeing to carry more of the smaller claim cost yourself. A lower excess may increase your premium, because the insurer is taking on more of that upfront claim cost.

So why would someone pay more to reduce their excess?

The answer comes down to comfort, cash flow and risk tolerance. Some people would rather pay a higher annual premium knowing that, if they need to claim, their out-of-pocket cost will be lower. Others are comfortable accepting a higher excess because they are mainly concerned about major losses and are happy to self-fund smaller events.

Neither approach is automatically right or wrong. The right balance depends on your financial position, the asset being insured, how often you might claim, and how much uncertainty you are willing to accept.

For businesses, this decision can be even more important. A business may choose higher excesses to manage premium costs, but it must also consider whether it could comfortably absorb multiple claims, downtime, equipment loss or liability-related costs.

The real value lies in understanding what you are covered for, what you are not covered for, what excesses apply, and how the policy would respond when you need it most.

General insurance advice is important because policies can vary significantly. A qualified general insurance broker or adviser can help you assess your risks, compare cover options, understand exclusions, and choose a structure that suits your circumstances.

Insurance is not just about buying a policy. It is about making an informed decision on how much risk you keep, how much risk you transfer, and how comfortable you would feel if the unexpected occurred.

If this article has inspired you to think about your unique situation and, more importantly, what you and your family are going through right now, please get in touch with your advice professional.

This information does not consider any person’s objectives, financial situation, or needs. Before making a decision, you should consider whether it is appropriate in light of your particular objectives, financial situation, or needs.

(Feedsy Exclusive)

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Please consider whether the information is appropriate to your circumstance before acting on it and, where appropriate, seek professional advice.