Sep 2, 2020

Why Do People Buy Insurances?

The fundamental reason people buy insurances is claimed to be to save for a rainy day pertaining to their health, homes, vehicles, etc. However, the fact that insurance companies remain profitable testifies that only a small percentage of insurance buyers claim their insurances. This implies that not every insurance buyers stumble upon a rainy day, and those incidents that qualify them to claim insurance have extremely low probabilities of happening. One can validate this by evaluating the chances of dying before parents die — which is extremely low¹.

It is not merely that the probabilities of these events are low, but these probabilities are getting lower. Take the case of road accidents, where the number of deaths are decreasing due to safer vehicles and tough regulations. The social psychology plays well here. People have a tendency to judge accidents by their absolute value rather than percentages. We say that we had x number of accidents and y number of deaths instead of x% or y%. Absolute values are higher than percentages — if 300 people die in Bengaluru due to accidents, that's just 0.00002% of the population. But for the intuitive mind, 300 is a more grievous number than 0.00002, thus making accidents seem a bigger concern because 300 people died, not 0.00002 people or percentage. Now, safety laws are implemented to curb accidents and deaths and they work. Given this case, the probability of dying in an accident gets lower, further decreasing the chances that you will claim your insurance. As life becomes safer, rainy days get infrequent.

All these findings raise a question: if people buy insurance policies for a rainy day and only a small percentage of them end up with the rainy day and actually using the policy, are insurance policies an unnecessary product for all people? If you buy a motor-cycle but don't use it at all, to common sense, the motorcycle isn't a required product. One can argue that it's nice to have a sparingly used motor-cycle at home to use when required than not have a motorcycle at all. This makes sense only if the cost of the motorcycle is negligible. Insurance policies are are expensive.

But they make great sales. So what drives people to buy insurance policies besides taxes? The emotional state of a person after buying an insurance policy would shed some light — a sense of relief and security. So people are actually investing in this sense of security, which can further be validated by analysing how insurance agents sell buyers a policy. They point out how stupid it is to not have insurance and how dire the financial consequences will be when incidents like accidents happen. They make you feel insecure and stupid and then work your emotions into buying insurance policies.

The point is, we do not really always know for sure the drives or reasons behind our actions. This is the reason why psychologists and counsellors question their clients for hours to help them understand the true reason behind some of their actions or emotional states.