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Choosing between Insurance and Savings

A key part of building an insurance project, or participating in it, is making decisions about how to balance insurance with other complementary risk management tools, such as savings.

For some situations, it may make sense to put most of your resources in insurance.
In other situations it may make sense to keep most of your money in savings.

In many situations, it may make sense to not buy insurance at all.

This time, when we travel back in time, we will make another choice, how to balance our money between insurance and savings.

You have ten coins.

  • Insurance: For every coin you pay to insurance, if there is a payout, you would get 4 coins, once the insurance fees have been taken out.

  • Savings: For each coin you save, you would get a 1 coin plus 1/5 coins worth of interest at the end of the season.

Now we will travel back in time to the beginning of the year and start all over.

We assume the insurance usually covers the drought, but not always.

Again, you have a 1 in 5 chance of drought. We will draw from the 1 drought and 4 good year possibilities from the hat and then...

If it is a drought year, we will draw again from the hat. For the second draw there will be 2 blue packages of gum and 1 red one, representing a 2/3 or 66% reliability of the insurance.

Make the choices!

1) Savings Vs Insurance

  • How many coins do you use to buy insurance?

  • How many coins do you save?

3) Productive risk

  • Put your left thumb up if you take the chance

  • Put your left thumb down if you stay with your current, low productivity package

3) Insurance

  • Put your right thumb up if you buy insurance

  • Put your right thumb down if you do not buy insurance