How to Manage Your Personal Risk

This year, I retired from a Fortune 500 Chemical company as a Manufacturing Advisor after 29 years. I learned many things about managing risk during that time. The typical industry approach to risk management is a 6 step process.

  • Step 1: List all assets and assign importance to each one.
  • Step 2: Develop a plan for the most critical assets that identifies all risks associated with each one.
  • Step 3: Evaluate the probability of occurrence and the consequences of each risk.
  • Step 4: Prescribe cost effective actions to eliminate or reduce each risk to an acceptable level.
  • Step 5: Perform these actions on schedule.
  • Step 6: Reassess the plan by evaluating the cost effectiveness of the actions performed and identifying any new risks.

We use a very similar approach when helping our clients manage their personal risks.

We start by getting to know you and your values and creating a list of your assets, needs and goals. Assets include your Home, Autos, Boats, RV, Business, Savings & Investment. Your needs might include Replacement income or final expenses. Your goals may be a College education for your children/grandchildren or funding a favorite charity or endowment.

We work with several Fee Only Financial Advisors and recommend our clients consult with theirs to develop a needs assessment. If you don’t have one, contact us. We’d be happy to recommend a few! Once we have this list, we work with you to understand your order of importance of each. That’s Step 1.

Next, Step 2, we create a plan for each of the most important items identified in the above. Developing this plan starts with identifying the risks to each item.

Typical risks to your home are Fire and Lightning, Wind, and Flood while your Savings & Investments could be threatened by market corrections, liability lawsuits, critical illness, or even criminal charges.

Once the risks are identified, it’s necessary to evaluate the probability and consequence of each and every risk.

Probability is best defined as the ‘likelihood of occurrence‘ while my best definition of Consequence is the ‘impact of an event measured in the cost to restore the prior value of your asset‘.

It’s important to understand probability NEVER changes. The fact that an event has never occurred before, doesn’t decrease it’s likelihood of occurring. Conversely, the recent occurrence of an event does not increase it’s probability of occurring again. Think of it as a coin toss. Because there are 2 sides to a coin, the chances of a coin toss coming up heads is 50% each time time it’s tossed. While it’s possible to for it to come up ‘heads’ twice in a row, the probability remains the same for the subsequent tosses, 50%.

Another common mistake is to confuse the consequence with probability. Scary high consequence does not increase the probability of occurrence.

Lastly, it’s important to understand that consequence, the cost to restore the your prior value, is directly proportional to your net worth. A $100k lawsuit against you is a HIGH consequence if your net worth is only $1M, but it is much lower if you are Jeff Bezos.

Once these two risk factors are evaluated, you could plot them on a matrix like the one below.

Common, medium to large risks with medium to high probability should be addressed with an action. Mitigating HIGH consequence risks with a very LOW probability, like an alien invasion, are unrealistic and expensive to address, while very LOW consequence HIGH probabilities are easy to address but not cost effective. It’s like purchasing a $15 warranty on a $100 microwave. That’s Step 3.

There are 4 methods commonly used to manage risk. Avoidance, Reduction, Retention, and Transfer

For example, here are some options for managing the risk of an auto accident that should be :

  • You might chose to avoid the risk of an auto accident by taking an Uber.
  • You could reduce the risk by only driving on weekend and avoiding traffic.
  • You could retain the risk by depositing $40k with the Texas Department of Insurance and self insure.
  • You could transfer the risk by purchasing an auto insurance policy

Identifying the most cost effective solution is Step 4.

Step 5 includes using an independent agent to transfer as many risks that are affordable and avoiding, reducing or retain the others.

The last step, Step 6, is a periodic or annual reassessment of your plan with your trusted independent insurance agent and financial advisor. Meet with your financial advisor to reassess your net worth, your needs and your goals.

Finally, meet with your independent insurance agent to review your policies current policies for appropriate coverage and better rates.

Call us today at (832)554-9815 or book some time on our calendar today and let’s get to know each other.

All the best,

Richard

Richard Carruth is Principal and Owner of Carruth Insurance.




Avoiding common short-sighted insurance mistakes

After your mortgage, your combined home and auto insurance premiums are likely the second largest line item on your monthly budget.

I remember as a young parent struggling to make ends meet, I was tempted to cut expenses where ever I could and insurance seemed like low hanging fruit. I visited my insurance agent and told him I wanted to eliminate any coverage that I wasn’t obligated to purchase.

Fortunately, I had an insurance agent at the time that cared enough to explain my coverage and how it protected me.

Recently, a very good friend called for a quote on an umbrella policy and agreed to let me review his home and auto coverage’s.

My friend has always been a fastidious saver and a generous giver. He and his wife live modestly and have been loyal stewards of what they’ve been given. I can’t recall a single instance where they’ve splurged on anything. Consequently, they are also blessed with an abundant net worth any of us would be proud of.

Instead, now a multi-millionaire, he still carried only minimal liability coverage that protected a very small fraction of the assets he’d sacrificed to accumulate. While he was saving a few hundred dollars a year, we was risking the loss of millions.

Penny-wise and pound-foolish

The temptation to decline discretionary coverage can be great, particularly when times are lean, but it’s important to not make decisions that can work against your own interest. Benjamin Franklin called this “Penny-wise and pound-foolish”.

Insurance is a financial contract that transfers a risk that can not be borne to another in exchange for a premium. If one can afford to bear all their risks, they would be foolish to pay to transfer it. Conversely, if one has a risk that endangers their future and livelihood, they would be wise to insure against it. There may be very good reasons, for some, to carry state minimum coverage’s or decline coverage’s like Personal Injury Protection, Medical Coverage and UN-insured/Under insured motorist. Others could be risking everything they have including the ability to retire.

Each of us are individuals. Our financial circumstances likewise, are peculiar to each of us. Just as there is no single investment that makes sense for all, the vehicles required to protect our future and fortunes must be adequately matched to your needs.

Carruth Insurance is here to help you with these decisions. If you’d like a no-obligation, independent review of your insurance policies we would be honored to get to know you and be that trusted friend and advisor.

Book a meeting with me when your’re ready to talk about your insurance needs.

All the best,

Richard

Richard Carruth is Principal and Owner of Carruth Insurance.

Protecting your retirement with Liability Insurance

You and I have worked hard to provide a comfortable life for ourselves and our loved ones into retirement.

Some of us have worked for 40 years to accomplish it. For those of us in good health with good genes, the fruits of our long labor may need to sustain us for 30 years or more.

If you’re like me, you spend a good deal of time planning for what might go wrong.

If you’re like me, you spend a good deal of time planning.

Typically, market corrections come to mind like the recent COVID-19 scare. We might focus on asset allocation, P/E ratios, avoiding unnecessary fees, re-balancing, or diversification.   But, we don’t like to consider the possibility of the unthinkable and its effect on our financial plans.

An associate recently shared a story with me about their client and friend. Like you and I, his friend worked hard for decades and had retired comfortably a few years ago. While on a short driving vacation, they stopped for refreshment. Backing out of their parking spot, they unfortunately had an accident with a motorcycle. Both parties to the accident did everything right, the motorcyclist was hearing a helmet. In spite of all this, the motorcyclist unthinkably died. There were no charges filed, no tickets issued, but they were later sued in civil court by the motorcyclist’s family. I can’t imagine the grief felt by either party.

Their insurance carrier settled out of court. The $300,000 liability limits on their auto policy was insufficient to cover the settlement as you might imagine. Fortunately, they were adequately insured. They were wise to heed the recommendation of their insurance agent to purchase an umbrella policy that covered the difference, protecting their future.

My father once told me that “We can learn something from anyone, even if it’s what not to do.”

Years ago I had an old tree in my front yard. It was an ugly tree. An elderly man would stop by every spring in his old truck. Looking for work, he asked to let him cut it down. He must have been in his 70’s. I admired his tenacity and work ethic and I regretted that he had to work at his age so one day I said “yes”.

He was amazingly strong and healthy and did a great job for a good price! But, I took a risk that I shouldn’t have.

I didn’t ask for his insurance certificate because I was certain he didn’t have one. Without him having General Liability and Workman’s Compensation insurance, I would have been liable if he was hurt. If he was injured, my Homeowners policy would have paid for first aid and medical expenses up to $5000. If he had been disabled or killed my Homeowners liability coverage would be activated. But, that was only good for $300,000, a fraction of my potential liability.

When we hire individuals to work on our property we should always ask for evidence of General Liability and Workman’s Compensation insurance. It may cost a little more to hire a reputable and adequately insured contractor, but protection of your future is included in that cost. Even if no one is hurt, they might unintentionally cause damage to your property that neither party could afford.

My favorite question to ask when I’m looking for a solution is “What would you do if it was yours?”.  

I like to partner with fee-only financial advisors like Justin Brownlee of Brownlee Wealth Management and others like them because they have no commercial obligations with respect to their recommendations. Because you are the only source of their livelihood, they have a fiduciary obligation only to you, their client. When you’re dealing with someone under a fiduciary obligation, you don’t have to ask my favorite question.

Investopedia defines fiduciary as “The highest legal duty of one party to another, being a fiduciary requires being bound ethically to act in the other’s best interests. …”

Carruth Insurance is an independent insurance agency. Because we are independent, we’re not obligated to a single company that dictates what to offer to our clients.  We have access to scores of insurance carriers offering auto, home, life, annuities, health, and all types of commercial insurance. This independence frees us to assume the fiduciary responsibility to our clients, finding them the best coverage at the best price.  At Carruth Insurance, we work with your fee-only financial advisor as part of their extended team to ensure your retirement future is adequately insured and protected with the best policy available regardless of our interests.  

Have a discussion with your advisor soon about your defensive plan for protecting your wealth against risk. Ask them to engage us soon for a complementary insurance review.

Book a meeting with me when your’re ready to talk about your insurance needs.

All the best,

Richard

Richard Carruth is Principal and Owner of Carruth Insurance.