Insurance: why Jason Murphy says it’s more like gambling
WE NEED it right? Wrong, says Jason Murphy. Insurance is like a casino, where the house always wins, and always wins big.
INSURANCE is gambling — for people who believe they don’t gamble.
This week, news.com.au revealed customers on top hospital cover at insurer HCF were 70 per cent in deficit. That means if they pay in $270 a month they get back just $81. That’s a very bad bet.
The reality is you probably pay far more into insurance over your life than you ever get out. Just like the casino, the house always wins. And they win big.
Take insurer IAG. In its previous six months it took in $5.5 billion in premiums, averaged a 14 per cent margin, and made after tax profit of around $500 million, according to its half-year report issued in February.
The margins in insurance compare rather well to those at bookmaker Sportsbet, which are often around six per cent.
That’s why I’ve decided to mostly avoid insurance. I’d rather keep the few thousand a year I save in premiums, and take the risks. But the very idea of that makes some people very nervous.
AVERSION TO A VERSION OF THE FUTURE
Why do smart people take the gamble of insurance? Because of something called risk aversion.
A bookmaker gives you the chance to get ahead. But an insurer gives you the chance to not fall behind.
People have set up their lives around a certain house, a certain car, a certain income. If any of those are taken away, their life will be wrecked. (Or so they believe). So they make a little bet. If bad luck conspires to burn down their house or steal their car, etc, they will get a payout.
This costs them, but means their life will run more smoothly even if they have bad luck.
Humans tend to be risk-averse, so smoothing out your life is very popular.
Gambling is seen as being for greedy people who want to get ahead, while insurance is seen as being for sensible people who want their lives to run smoothly.
If you are not risk-averse, and you can take a bit of bad luck in your stride, there is no difference between gambling and insurance. But risk-aversion is different for different people at different amounts of money. Most people are not risk averse for small amounts, but when it comes to big enough sums, we all start to get the fear.
FEAR FACTOR
The problem is insurance tries to ramp up our fear, even for little things.
The insurance industry loves to put out press releases urgently warning Australians we are the most underinsured people in the world.
“Research has consistently shown Australians don’t take out adequate levels of insurance to protect themselves and their family,” they say. Is it true?
Far too many of us are insuring against small events we could easily afford to cover ourselves. Have you ever bought the extended warranty on a product? That’s a great example of paying for insurance when really, the smarter move would be to take the risk yourself. Likewise, a lot of people have comprehensive insurance on cars they could actually afford to replace if stolen.
Remember – they only offer insurance at a price where they know most people won’t get an advantage. The smart move is to only insure against eventualities that would really wreck you and self-insure the rest.
It is a paradox – insurance is most important for people who are strapped for cash, yet they are the ones that could most benefit from saving the premiums. If you can easily afford the premiums, chances are you can also afford to cover the disaster you’re insuring against!
THE BIG ONE
The big insurance rip-off in Australia though is not extended warranties or even that ridiculous “ticket insurance” Ticketek offers in its check-out process.
The big insurance rip off is health insurance. In that case, we are already paying for a wonderful insurance program called Medicare. But the government will still charge high income earners more tax if they don’t also have private health insurance. This is in effect a giant subsidy for private health insurance, guaranteeing them lots of customers.
Of course, if you do have private health insurance, you can still get treated in a public hospital, and in an emergency, you probably will be.
The big beneficiaries of this policy are none other than the insurance companies themselves. For them, the industry is not really a gamble at all. It’s practically a sure thing.