Why you hate Insurance, and the Base Rate Fallacy

Ok, so you aren’t a big fan of insurance. We get that. For most people, having to pay out their hard earned cash for some piece of paper ranks right up there with “Dentist Appointment” and “Going to jail” on the list of “Things we really, REALLY don’t want to do”. And that makes sense. Sort of.

You see, it’s not JUST a piece of paper you’re getting, there are several obligations that an insurance company owes to you. But the inner-insurance professor within you already knew that.

And because you already know all about insurance, you can already make the argument. “But Lorne! That stuff only happens when I get into an accident, and I’m a careful person!” And that’s what I hear day after day in my office.

As consumers, we are used to instant gratification. We spend our money, and we get something. And it’s typically something very tangible. You buy a life-size statue of Adele, you get to pick it up and carry it home to your concerned family. You buy fifty big macs, you get the shocked look on the cashiers face and the joy of eating an entire cow. Even if you get something more service oriented, like legal advice or portfolio management, they are still giving you a service right away.

So we are used to getting things right away, and then Insurance comes along and wrecks everything. They just take your money and smile at you, there is no instant benefit. And in the BEST case scenario, where nothing bad happens to you, they take that money and laugh all the way to the bank with it. This effectively makes Insurance a punishment, not a product.

And you couldn’t be more wrong.

You see, the flaw in your logic lies in the focus on the “best case” scenario. And that is the “Base Rate Fallacy”, and a related concept in psychology, called the “Neglect of Probability”. The truth is, humans are bad at probability. Back when our hunter gatherer ancestors were combing the forests looking for berries or game, they never paused to ponder the likelihood of a tree falling on top of them, or the chances of them finding a certain type of prey. This compounded over generations into humans generally not understanding statistics. We think our life is special, different, and does not conform to averages or expected values. This means that when we see probabilities or stats, we take whatever perspective benefits us most. A 0.0001% chance of dying in a car Accident? It will never happen! A 0.0001% chance of winning the lottery? Time to buy tickets!

This primal cognitive error is painfully evident in insurance. We don’t need insurance because we won’t get into an accident, and if by some horrific stroke of luck we are in one, we won’t need high limits because it will never be serious. And we actually believe this; we truly feel that it will never happen to us. That isn’t the voice of reason speaking to you – it’s your inner caveman talking.

You will almost certainly get into at least one accident. Car insurance estimates you will get into more than 4 in your lifetime. That is pure fact. Another fact is how expensive these crashes can be, they can ruin your entire life. This becomes especially true in cases involving injuries or death – The Automobile Association of America estimates the per-person cost of traffic fatalities is $3,200,000, while the cost of injuries is $68,170. Those are really big numbers, and why you actually do NEED insurance, with high limits.

Insurance will keep your life from being destroyed if you get into a huge accident, and prevent your finances from being messed up if you are in a minor fender bender. The chances may be low, but the costs are so high that it is simply worth the risk. That’s why I cringe whenever I see people decline recommended coverages. They turn down millions in higher limits, available at very low cost, because they don’t think they will ever need them. They think with bias, allowing the inner caveman to control them while it says – “It won’t happen to me”. And then it does. And by then, it’s too late.

If you want to make sure that you are protected when the odds turn against you, we have a quoting tool on our website as well as professional brokers available who will make sure you are protected. You can find us online, through email or call 1-800-361-0941.