It's all about the claim - apart from when it's all about not claiming

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Monday, September 10th 2012, 6:00AM 2 Comments

by Russell Hutchinson

I'm a big fan of focusing on claim events with insurance. I have recently written about the importance of focusing on claims stories and telling them to clients. I may even have used the phrase "it's all about the claim". I now want to demonstrate the value insurance policies give without clients claiming - so I must admit that it isn't only about the claim.

Tyler Cowen, an otherwise excellent economist, says in his book that insurance is "unfairly priced" because "The company offering the insurance cover must cover its payouts or repair costs plus the costs of selling the insurance. Since the costs of selling the insurance end up being passed along to the buyers, in the long run the buyer fails to break even. Some buyers will get lucky and come out ahead, but buyers as a whole will lose money."

So wrong, and Mr Cowan, a bit lazy too, from an otherwise penetrating analyst of economic situations whose book is well worth reading.

Cowan appears to mistake the claim payment as the only value a client can receive from an insurance policy. In fact, as most good insurance advisers know this can't be all the value.

Imagine no insurance existed, every time you got in a car you would be betting your entire personal wealth that you won't have an accident. Have an accident and wreck a posh car, or drive into a house - and ruin awaits. What if in order to drive you had to post a bond equal to the full amount of any possible claim? Only millionaires could drive...

Perhaps the roads would be safer. But we would definitely have many fewer drivers too, which would definitely impose losses on everyone. So insurance makes it possible for people with no capital to take big risks. Or even if we have capital, to allocate it to other tasks, such as buying a house. That value accrues to people who have bought insurance even if they never claim.

This is the ‘peace of mind' value that good insurance advisers always talk about.

However, I shall borrow from Mr Cowen another part of his argument that I like better and identify with more:

"Buying insurance is often about image" and he goes on to say that "My wife wants to make sure I am not one of these people with a careless or reckless self-image and therefore she expects me to buy lots of insurance."

So another key part of the non-claim value of buying insurance is the ‘signal' of our behaviour. Again, good insurance advisers will be familiar with the powerful motivation that having a family provides - and yes, you probably use that in selling. But it isn't a ‘trick': It provides a real signal to loved ones of your intention to look after them no-matter what the circumstances.

Even without a claim that enables a family to get on with being a family and a business to get on with business with a lot less worry, and capital, tied up in fear of a future event. 

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