The Anatomy of Insurance: The Primal Motivation (Part 1)

Written by: Leo ,

December 06, 2018

“It’s fear that sells insurance” – Leo

Why do we buy insurance? Why do we need to insure our health, house and car? Why do we pay someone thousands of dollars for the exchange of a peace of mind, that an accidental (probable) event which may cause us to be bed-ridden for life and an absolute depletion to our financial fountain?

Answer: Fear.

Fear is one of the primal emotion that is hardwired in us since the dawn of human (homosapien) history. It’s also the primordial instinct that ensures future propagation of human civilization, by alerting us of the danger and threats.

From an evolutionary lens, our main purpose here on earth is to survive and replicate (procreation). Food, water and shelter are the basic resources needed for the survival of our offspring. Any unforeseen threats and circumstances that may potentially drain us of our resources, is to be avoided, at all cost.

In the modern day context, money is one of our most important resources. We need money to pay for our food, utility bills and the mortgage of our home. An economic crisis can cause a financial strain in a family’s income. This can affect the amount of resources that we can buy and provide for our children (offspring).

We buy health insurance so that we can have a financial cushion from the muscles of an insurance company, in the event of an illness or accident that warrants us necessary admission to the hospital. The medical bills and surgeon fees can potentially wipe out our hard-earned savings (resources) if we do not have an adequate insurance plan.

Fear motivates us to act on mitigating the risk that will put us in an undesirable financial situation. Such is the nature of insurance. It transfers the risk of being financially depleted when accidents occur. The fear of the unknown, that something really bad can befall on us will trigger our natural physiological response to neutralize that probable chance of happening.

“Fear of loss triumphs the desire to gain”

Studies have shown that people are twice as likely to choose a situation where they can avoid loss rather than to acquire equivalent gains. A research study by a psychologist from University of California (UCLA) further illustrates that the fear of loss coverts better than the desire for gain.

When given two choices on what to do with a $50 bill:

1) Keep the $30

2) Gamble, with a 50/50 chance of keeping or loosing the whole $50 43% of the respondents choose to gamble

The options were then revised:

A) Lose $20

B) Gamble, with a 50/50 change of keeping or losing the whole $50 62% now choose to gamble

Just by suggesting Option “A” as a loss created a significant jump of 44% in the number of respondents choosing Option “B”

The fear of loss (loss aversion) and the avoidance of pain are the fundamentals of human emotions that cut right through the core of who we are. When we learn to embrace the natural tendencies as a human, we can then manage our expectations and make more informed choices in life.

In my next post (Anatomy of Insurance: Part 2), I will share more about the economics (the actuary side of how insurance premiums are determined) and the triangular relationship between the insurance company, agent and customer.

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