Woe is Pricey Part II

In an earlier post about pricing insurance I’d wondered why the vast majority of consumers shop for insurance based on price alone when there are clearly a lot of differentiators, and serious consequences for claims, between different cover options.

After an email exchange with an economics whiz at Ohio State (thanks Eric!) here are a few more thunkers:

Risk Aversion:  If you’re scared of risk and you have the cash, you’re just going to buy the best looking cover if you can identify it.  Perceived risk plays a role here, that’s why mobile phone co’s (et al) can sell you electronics policies that cost almost as much as insuring your whole house.

Self Assessed Risk:  Can’t happen to you?  Can’t happen to young people, they believe.. Indestructibility!  If you don’t believe there’s a risk, you aren’t going to pay to avert that risk.  Problem is, it seems, we’re not so great at evaluating risks as consumers, leading us to pay through the nose for things that aren’t risky and vice versa.

Rational Ignorance:  Here’s where I think the biggest issue lies.  Because insurance is so bloody hard to understand for most people, they don’t bother understanding.  If you look at the example of an early middle age taxi driver for example – young family, livelihood depends on being able to operate, would be catastrophic if taxi / driver off the road for a period of time – he shouldn’t be price sensitive (within reason).  But in our surveys, he almost always uses price as the deciding factor.  Rational ignorance suggests that when faced with three similar policies, but each with certain key differences that could make or break the effectiveness of the cover – he’ll just revert to the thing he understands the most to decide – price.