November - December 2017

Written by Keith Schwanz

From his column It's Your Money

wolfHurricanes Harvey, Irma, and Maria—new names that may replace our memories of Katrina and the destruction that roared through New Orleans in 2005. Folks who study catastrophic events suggest Hurricane Harvey caused $65 to $75 billion in damages; Irma - $65 billion; and Maria – as much as $80 billion!

With such extreme losses, financial analysts are busy calculating the impact on insurers who sold policies in the affected regions. These companies deal with risk, so they recognize their own vulnerability. They are also insured through what is called reinsurance.

The Power of Pooling

Insurance involves pooling monies for the benefit of the participants. Most of the time this is done through an insurance company. The contract between the insured and the insurer specifies the particular losses covered by the insurance company in exchange for the premium paid by the person insured. In this legal transaction, the insured transfers the risk of financial loss to the insurer. The insurer then “pools” all of the premiums received and claims are paid by dipping into that pool.

For example, suppose a woman falls in a church kitchen and breaks her arm. I know from pastoral experience that this kind of thing happens. The resulting cost for non-surgical treatment is $2,500 for x-ray, cast, and doctors. Without insurance, the congregation would pay $2,500 to reimburse the woman’s expenses. But suppose 50 congregations decided to pool their resources. In this case, it would cost the congregation where the accident occurred just $50.

However, if the woman also smacked her head on a countertop, medical costs could rise exponentially. A single church or even an association of 50 congregations might not be able to manage the expense of a traumatic head injury. So the congregation joins a pool organized by an insurance company that may include tens of thousands of congregations. The greater the depth of the pool, the lower the premium for any one congregation. That is how insurance works.

Actuaries use mathematical calculations to estimate the probability of an event occurring, and they study historic data to approximate the frequency and severity of future events. From these statistics they determine an estimate of premiums necessary to create a pool large enough to keep everyone financially “whole.” And, in the event they underestimated the costs, the insurance company buys reinsurance coverage.

Types of Insurance

Several stories in the wake of last summer’s hurricanes focused on the topic of property insurance. A typical policy covers fire, theft, and some weather-related incidents. Specialized coverage for floods and earthquakes may require additional policies.

It’s a good idea for pastors to call for regular reviews of congregational insurance coverage as an essential piece of ongoing risk management. Property and auto insurance (if the congregation owns vehicles) is only the beginning of such an evaluation. Liability insurance is a prime congregational concern these days, including coverage for pastors and church officers. If a congregation sends out short-term mission teams, coverage for each trip should be considered.

Liability insurance is a prime congregational concern these days, including coverage for pastors and church officers.

Suppose a congregation’s youth group meets at the home of a parishioner. That evening a teen falls and is injured on a stake supporting the volleyball net. Who is liable—the congregation (since this was a ministry activity) or the homeowner (since it occurred on his/her property)? Suppose children travel by van to summer camp. Who is responsible should an accident occur between the church and the campground? If someone steals personal items from the pastor’s office, is the loss covered by the policy of the minister or the congregation? Ministers and church leaders need to know their insurance policies well enough to be able to immediately answer such questions. A firm grasp of such knowledge might influence some ministry decisions.

Pastors face several personal insurance issues. If living in a parsonage, renters insurance will provide coverage for personal belongings. Both homeowner and automobile insurance policies include liability coverage should another person be injured. An umbrella liability policy extends liability coverage beyond the limits in homeowner and automobile policies. A pastor might consider income protection through the purchase of short- and long-term disability insurance. Life insurance provides financial assistance to a beneficiary in the event of an untimely death.*

Understanding Insurance Is Vital

As with all financial instruments, a basic understanding of insurance is essential if it is to be used well. A person may have a familiarity with auto insurance, for example, simply because the premium is paid every six months, but not truly understand how the process works. To make good financial decisions, it’s important to know what is covered and what is not. A few minutes spent on one of the numerous websites that provide an introduction to how insurance works or a chat with an agent might influence decisions that could cost a church hundreds of thousands of dollars if a catastrophe occurs.

Keith Schwanz is a writer and editor. He previously served as a pastor, church musician, and seminary educator.

*Both long-term disability and life insurance are available to eligible Nazarene ministers and church-employed laypersons. Visit here for more information.

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