How Does The 80% Rule Applies To Home Insurance?

 Have you heard of the Pareto Principle? and are you wondering what the 80-20 Pareto principle is all about? If yes, then this post is for you. The whole idea of this article is to help you understand the Pareto principle, what the Pareto principle is all about, and how the Pareto principle work.

I believe if you read this guide to the end, you'll be able to understand everything you need to know about the Pareto principle. 

Our aim at InsuredHacks.com is to ensure you get the required knowledge in the field of finance. This is why we always use layman's explanations to explain whatever we discuss in this blog. Our mission is to ensure that even those without degrees or MBAs in finance are able to get involved.

With that all said, let us dive into today's topic of discussion.

What Does The 80-20 Rule Mean?

The 80-20 rule is referred to as the Pareto Principle. These rules stand that assets that are 80% of outcomes or even outputs result from 20% of all causes (or inputs) for any given event.

Stay clear okay. Let me explain in a layman's way so you can better understand what the Pareto Principle stands for.

As a business-minded individual, you must understand that the Pareto Principle exists in every line of business. This means that you need to identify the inputs that are potentially the product in your business before making them a priority. Let me give you an instance. Let's say as a manager running a business, what you need to do all the time is to ensure that you identify factors that are very critical to your business or company's success. Once you're able to identify these factors, you'll need to put more focus on them.

The Pareto Principle or the 80-20 rule is always used in business and economics. This doesn't mean that it can not be applied to other businesses outside of this field. No matter which line of business you operate, you can always apply the principle. However, to apply it you must understand it.

Don't worry, keep reading. We'll get to the bottom of it very soon.

When it comes to Wealth distribution, personal finance, spending habits, and even infidelity in personal relationships you can always introduce the 80-20 rule to ensure that this work out for you in the direction you want.

Before I dive deep into the topic, there are some things I need you to note down or have at the back of your mind while you read on.

Below are some Major things you need to note while studying this guide.

The 80-20 rule means that 80% of the outcome is always derived from 20% of the cause. With this, it also stands that for you to get the best, you'll need to prioritize the 20% of the factor that will give the best-desired result.

It's making sense now, right? ok... Let's ride on

With the principle of the 80-20 rule, the goal is to ensure that you're able to identify an entity's best assets and use them efficiently to create maximum value.

This rule is a precept, not a hard-and-fast mathematical law.

People sometimes mistakenly conclude that if 20% of factors should get priority, then the other 80% can be ignored.

So will all that said, let us dive into how the 80-20 Rule Works

Also Read: The Importance Of Property Insurance (All you need to know)

Also Read: Getting an Insurance Company To Pay For Roof Replacement

How The 80-20 Rule Works

The 80-20 percent rule is easy to understand but at the same time, it might be complex. 

Let me break it down

The 80-20 rule is more of the principle of cause and effect. That sounds familiar, right? okay.

With this rule, 80% of outcomes (Outputs) are always derived from 20% of causes (Inputs). With this rule, you'll realize that the rule is designed to point out that the 80% of revenue a company can generate at a particular period is a result of the 20% of customers they have.

As a company, you are supposed to focus on the 20% of customers you have patronizing your business for you to come up with 80% of the revenue and know how to strategically market to those customers. When you're able to work continuously with this, you'll be able to retain those clients and even acquire new ones using the same similar characteristics.

Let us go deeper into some fundamental meanings of the 80-20 rule to get a deeper understanding of the rule.

What Are The Core Principles of The 80-20 Rule?

The core principle of the 80-20 rule is basically all about the identification of an entity's best assets and using them efficiently to create maximum value.

This simply means that as a business person or owner who operates a company, you should be able to use the idea of the 80-20 rule to identify the major areas of your business that will create the most benefit for the growth of your business and ensure you focus your energy towards that. This doesn't necessarily mean that you should ignore other things in your business.

A lot of people always misinterpret this rule and in the end, it looks like something that doesn't work.

Let me help you clarify this misinterpretation of the 80-20 rule.

What Are Common Misinterpretations of The 80-20 Rule (Pareto Principle)?

People always misinterpreted the 80-20 rule all the time. This is why a lot of them do not realize that the 80-20 rule is a general rule intended to regulate behavior or thought which makes it far different from mathematical laws.

In this rule, it is very important that the percentages equal 100%. 

In the 80-20 rule, Inputs and outputs simply represent different units. The percentages of these units don't have to add up to 100%. It's the concept behind the rule that matters.

There's another way in which the 80-20 rule is misinterpreted. Namely, if 20% of inputs are most important, then the other 80% must not be important. This is a logical fallacy. The 80% can be important, even if the decision is made to prioritize the 20%.

How Was The 80-20 Rule Discovered (80-20 Rule Background)

The 80-20 rule which is known as the Pareto  Principle is applied to what is called the Pareto Analysis. The rule was first introduced and used in microeconomics to explain the distribution of wealth in Italy around the early 20th century.

The 80-20 rule was introduced by Vilfredo Pareto of Italy, an Italian economist who is best known for the concept of Pareto Efficiency.

During the time when he introduced this rule, Pareto noticed that the pea pods in his garden were responsible for 80% of the peas. After several observations, Pareto was able to expand this principle to microeconomics by showing that 80% of the wealth in Italy was owned by 20% of the population.

As of 1940, Dr. Joseph Juran, a prominent figure in the field of operations management, applied the 80-20 rule to quality control for business production. With this principle, Dr. Joseph Juran (JJ) was able to demonstrate that 80% of product defects were caused by 20% of the problems in production methods. When he was able to figure that out, he decided to focus on reducing 20% of the production problems, this alone was able to increase the overall quality of his products. With this Juran referred to this phenomenon as "the vital few and the trivial many.

What Are The Benefits Of The 80-20 Rule?

Despite little scientific analysis to prove or disprove the 80-20 rule validity, there is still much evidence that supports the rule as being essentially valid, if not numerically accurate.

This is because a lot of people most especially business people have shown some level of success just by following and incorporating the 80-20 rule.

Understanding The 80-20 Rule For Home Owners

As a homeowner, most of the insurance companies out there may require you to purchase replacement cost coverage. This coverage is worth at least 80% of your home's replacement cost which you must pay in other to receive full coverage.

When it comes to applying it to your homework, the insurance company will only be responsible for the coverage of the overall cost of the damage to your house if you've purchased insurance coverage equal to at least 80% of the house's total replacement value.

If for any reason the amount value is less than the minimum of 80%, the company will only ensure it reimburses you with a proportionate amount of the required minimum coverage that should have been purchased.

Example Of How the 80% Rule Works for Home Insurance

Here is an example that explains how the 80-20 rule applies to you as a homeowner. Let's say you own a house with a replacement cost of a total of $500k and your insurance coverage is a total of $395k. A flood happened and destroyed some things worth $250k, you might assume that since the amount of coverage is higher than the cost of the damage ($395,000 vs. $250,000), so the insurance company should reimburse the entire amount to you. 

That will not happen because of the 80% rule.

With the 80% rule put in place, the minimum coverage you should have bought for your home is $400,000 ($500,000 x 80%). If that threshold had been met, all partial damages to your home would be paid by the insurance company. However, since you did not buy the minimum amount of coverage, the insurance company will only pay for the proportion of the minimum coverage represented by the actual amount of insurance purchased ($395,000/$400,000), which amounts to 98.75% of the damages. Therefore, the insurance company would pay out $246,875, and unfortunately, you would have to pay the remaining $3,125 yourself.

Conclusion

With all of that said on the 80-20 rule, the main aim of the rule is all about identifying an entity's best assets and using them efficiently to create maximum value. I believe you must have learned one or two things about the 80-20 rule. 

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