The Why #25: Why do I keep paying for insurance that I never use?
By Dan Monheit, 6.8.21
Question submitted from Francis, Carlton
They say it’s hard to be certain about anything in life except death and taxes. But you, dear Francis, sound certain that something’s not quite right here.
Month after month the cash flies out; Health insurance when a guy like you never gets sick. Car insurance when, thanks to Covid, you can’t even remember what it’s like to fill up the tank. Contents insurance when (also thanks to Covid and the never ending lockdowns) it’s all but impossible to get robbed. Life insurance when you haven’t even come close to dying. On and on it goes, without a claim, a benefit or the need for a safety net in sight.
So cancel it. Go on. I dare you.
Live a little.
Why not self-insure?
Save all those premiums and just buy a new car/guitar/kidney if the need arises, right?
‘But what if’ we ask ourselves. What if by some crazy chance our perfect bill of health or flawless driving record take a turn for the worse? We know the likelihood is minuscule and that all of those premiums can’t possibly make rational, financial sense (after all, insurers are pretty good at running profitably), but still, we stay.
So often in life we choose tangible, short term benefits over hazy, long term ones. In fact, there’s a whole other bias that speaks directly to this (hello Temporal Discounting).
What is it about insurance then, that flips the script?
Zero Risk Bias
Zero Risk Bias describes our irrationally strong preference for situations that have absolute certainty. By and large, we prefer options that eliminate one type of risk completely, even if that increases that total risk that we are exposed to. In other words, we love a sure thing, even if — objectively speaking — the sure thing is not the best thing for us.
Research conducted by Zeckhauser, cited by Kahneman & Tversky (1979), asked participants to imagine they were playing a game of Russian Roulette, with the option of paying for individual bullets to be removed from the cylinder of the gun. What’s irrational, but also entirely unsurprising, is that participants were willing to pay far more to have the final bullet removed (cue certain life), than they were to have the third or fourth last bullet removed, even though the reduction in risk is identical for the removal of each bullet.
One of the biggest benefits of succumbing to the Zero Risk Bias is the joy that comes with having one less thing to worry about. In a world of seemingly endless things to worry about, it’s not surprising that we’ll pay a premium to have one such thing scratched off the list entirely — which is exactly what happens when we pay our insurance premiums. Sure, we know in our heart of hearts that we’ll probably never make a claim, but the peace of mind is almost value enough.
While reducing risk is always a good strategy, if we can remove it entirely (i.e. make something ‘zero risk’), we’ll enjoy disproportionate returns. It’s no wonder that risk eliminating sales techniques like the ‘money back guarantee’, the ‘free trial’ and the ‘post purchase price match’ have been around for as long as salespeople have.
To make the most of Zero Risk Bias, brands can look for ways to remove risk completely from the product itself (‘guaranteed pesticide free’), the way the product is purchased (‘cancel anytime’) or the outcome that customers are using the product to create (‘perfect pancakes in minutes!’). After all, nobody but Tom Cruise likes risky business.
Behaviourally Yours,
PS If you missed the last edition, you can still check out why people are so scared of the vaccine here.
