The 6 decision biases stopping consumers buying insurance

Published: February 28, 2019

Updated: April 1, 2019

Author: Luke Jones

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Most consumers will only cover themselves from risk when it is too late, often waiting for disaster to strike before taking action. A speaker at the recent CatIQ Connect conference in Toronto told attendees six decision biases are causing consumers to take this route.

Consumers who ignore risk and only purchase insurance or loss reduction services after a disaster are guided by the following biases:

  • Myopia
  • Amnesia
  • Optimism
  • Inertia
  • Simplification
  • Herding

Amnesia may seem a strange inclusion, but it means customers typically forget incidents from the past and don’t learn lessons from them. The six biases were put forward by Howard Kunreuther, professor and co-director of the Risk Management and Decision Process Center at the University of Pennsylvania’s Wharton School.

During his keynote speech at the CatIQ event, Kunreuther referenced the book he wrote with Robert Meyer, The Ostrich Paradox: Why We Underprepare for Disasters.

“People buy insurance after a disaster, by the way, not before, unless they are forced to buy it,” Kunreuther said. “Then they have it for a few years and say, ‘God, I’ve wasted all these premiums. Look at all the things I could have done with the money that I’ve spent on insurance. I’m going to cancel my policy.’”

Kunreuther pointed out insurance companies are struggling to convince consumers that never using an insurance policy is the best result. “Celebrate you haven’t had a loss. Very hard to do.”

The five other decision biases are:

Myopia – Only focusing on short term goals, such as only looking to tomorrow. “The real challenge with focusing on short-term horizons is that so much of what you want to do in preparing for disasters is to invest in adaptation,” Kunreuther said. “How do you adapt to climate change? How do you adapt to the flood problem? How do you reduce [and] mitigate the losses? These costs can be high. So if you’re only thinking about the next year or two or three, you’re going to say, ‘I don’t want to put my money into this, I’m not going to get a payback.’”

Optimism – Most consumers take a blasé attitude towards disaster, downplaying the likelihood of such events. “They’re below our threshold level of concern, we’re not going to pay attention to them,” Kunreuther said. “Even if they’re low, you may want to put some energy into thinking about them, as Hurricane Harvey illustrated.”

Inertia – Not wanting to break the status quo. “There is loss aversion, so if you lose 10 dollars, you’re feeling a lot worse about losing the 10 dollars than gaining 10 dollars.”

Simplification – Consumers like things to be simple, often making purchasing decisions based on simplicity. “Now if it turns out that you’re following the notion of being optimistic and you say, ‘Look, the probability is so small, I’m not going to worry about it,’ you’ve simplified your decision very nicely, but you’re not going to focus on the consequences at all,” Kunreuther said. “You’ve already tuned out of the events and you basically said, ‘I’m not going to pay attention to what might happen.’”

Herding – Typically, customers will follow those they know, such as friends and family. “We tend to focus on what others are doing, but they might not know any more than we do. Everyone is herding together and you got a social norm of not taking action and that is a real, real challenge to deal with.”