‘Bias of optimism’ and our reluctance to purchase insurance – The Royal Gazette
Life is coming: insurance is designed to protect us from major calamities
Many of us have, one might say, supreme confidence in our invincibility in the face of calamity. This is called an optimism bias, as in “bad luck happen to other people, but not to us”.
Optimism bias exists across the global human spectrum – transcending gender, ethnicity, nationality and age, occurring statistically in about 80% of any population. Specifically, we fully believe that we are in control, overestimating the likelihood of positive events and underestimating the risk of negative situations: traffic accidents, hurricanes, job loss and debilitating illness.
Second, the optimism bias tends to make us equivocal about the future.
Why should we then that the present is so great, that nothing bad is happening, that no obstacle to perfect life is in the way? Plus, planning for negative events is such a stressful and exhausting thought process; we’ve all been there so no one should be blamed for ‘putting it off to another day’.
Third, the optimistic perception of an individual’s control gives rise to a complacent thought process about our ability to purchase risk protection because “while I really don’t want to buy it now, or I don’t. sure I need property / health / life / business succession planning or other catastrophe insurance, but I think I’ll get there – someday. “
Optimism in itself is a wonderful thing, especially in personal and professional relationships, but it can be in detrimental conflict with proven facts that are relied on to generate contingency plans.
So optimism bias may account for much of the procrastination that follows – until the pressing reality of lack of protection hits home (figuratively speaking) as an impending catastrophic event looms. on the horizon.
Dear readers, there’s a reason insurance companies place moratoriums on increasing the limits of an existing policy or issuing new real estate policies, for example, if an impending hurricane is in a few weeks ( or less).
Cost and value. It is not so much the cost, although it is certainly a factor for many households, or because the individual or family has never had – so far – to file a claim (a big one until now). ‘to the next hurricane, for example).
It’s more about the feeling that the value for money is low – until absolute disaster strikes. Then, if the insurance exists, it is a comfort during a terribly stressful time for a family.
Readers’ comments on the cost of insurance have indicated it; “I have paid these premiums all these years, I have never had a claim, but the policyholders have my money.”
Two things to think about when it comes to home insurance.
1. Add up all the premiums you’ve paid over the years, say an average of $ 5,000 per year, for a replacement value of $ 600,000 to $ 800,000.
Note: This is a theoretical illustration, you will need to use your home and premium values, but the questions are the same.
a. Ten years – $ 50,000
b. Twenty Years – $ 100,000
vs. Thirty years – $ 150,000
re. Forty years – $ 200,000 and so on
2. Now, the second, you decide to “use discretion” – no assurance.
Could you save enough to replace your entire house for $ 200,000?
Half your house for $ 200,000?
A quarter of your house for $ 200,000?
If the answer is no, you can’t, what would you do?
We cannot predict real events, only calculate probability and try to plan for contingencies. The insurance component provides protection against catastrophes.
Risk still exists and can arise in just about anything: personal, business, government, commerce, country.
Cyber security risks, unprecedented years ago, are at an all time high. The extent of risk prevention required is enormous. In March 2021, a global / US insurance company, CNA Financial, paid $ 40 million in ransom after a cyberattack. If it can happen to them ……… ..
Insurance companies quantify and manage risk starting with two basic approaches.
• Avoidance does not put an individual, family or business in the first place.
• Reduction manages exposure costs through loss prevention programs.
• Retention, although a risk may be apparent or not at all understood, nothing is done.
• Risk transfer means that when you walk into an insurance office – or perform a Zoom interview – you (and your business) have made the decision to transfer the risk.
That’s not all they do.
Stay tuned for June Insurance Week.
Disclosure: the author has no relationship with any insurance company, local or global, and is not employed to receive commissions or gratuities from, or sell / buy insurance policies, securities, etc.
Captive: A History of International Insurance in Bermuda by Catherine R. Duffy, AIG, Bermuda Country Head, pages 4-5.
Although tiny and remote, Bermuda has always been important. It was one of the first ports in a global network and a cornerstone of what would become the British Empire. Bermuda has an importance, first strategic, then financial, out of proportion to its size.
1784. Bermuda first recognized the potential of the marine insurance business and then established the Bermuda Marine Assurance Company, issuing its first policy on December 28, 1784 to cover cargo from Bermuda to Philadelphia. The sum insured was £ 400 at a premium rate of 2.5% with a refund of 2% if no claims were made.
Bermuda launched its first postal service to enable efficient international trade transaction.
Bermuda Gazette was first published.
The ocean freight trade became quite lucrative with the export of products from Bermuda to the United States and Canada and encouraged the large British insurance companies to appoint general agents in Bermuda.
1815. Hamilton became the capital in place of St George’s. Mr. NT Butterfield became the Phoenix Assurance Company’s first point of contact between Bermuda and London.
1902. Harnett and Richardson (now a member of the Freisenbruch-Meyer group) became underwriting agents for Guardian Royal Exchange Assurance Co Ltd as the British sought new lucrative partnerships in the Bermuda market.
1903. A group of eight Bermudans, who understood the need for a national insurer for fire and freight insurance, formed the Bermuda Fire & Marine Insurance Company.
Henry Tucker was born. He would become a leading force to forever change the landscape of international trade in Bermuda.
“The optimism bias”, Current biology, Volume 21, Number 23, December 6, 2011, Tali Sharot
Simplicable, John Spacey, Singapore, https://simplicable.com/new/business-risk
Fundamentals of Risk and Insurance, Emmett J. Vaughan, Thérèse M. Vaughan