INSURANCE IS IRRATIONAL and arguably immoral. To insure yourself is to take a punt on an unlikely mishap. It is a negative bet. You stake a modest sum of money on very long odds, which the bookie (hereinafter referred to as “the Insurance Company”) has taken expert care to stack against you. A small outlay may just occasionally entitle you to a massive payout, but the chances are overwhelmingly that you will simply lose your stake. It is like the National Lottery, but more dreary because to justify your outlay you must hope something bad happens.
As readers contemplate their summer holiday plans, with the inevitable head-scratching over whether and how much to insure, you might consider the case of my fellow expeditionary to South America who, after more than six months, has received his payout from his travel insurers this week. The settlement was £80 — a fraction of his losses. Unfortunately for him he did not lose one or more limbs, put his eye out, or have three fingers bitten off by an Andean spectacled bear while climbing a tree in flight from the coils of an anaconda — or he would have hit the jackpot and could retire tomorrow on the insurance payout. His misfortune was to suffer the sort of mishap that actually happens. He was delayed.
He and I were among a small group trapped in a Colombian jungle town last summer. Leticia is reachable only by a 250-mile river journey, or by air, and the airport was closed on account of atmospheric haze. There were no flights to Bogotá, or anywhere else.
Arriving by river and finding the airport closed, the rest of us were content to postpone our return to London via Bogotá, cool our heels and wait. But my friend was due at his desk in England; the last flight permitted had left five days earlier; and nobody knew how long the haze would last.
My friend seemed to remember that his insurance policy covered the reasonable costs of unanticipated flight changes. Not far away was a Brazilian town whose airport had a superior radar system. From there you could fly to London. So off he went to Brazil, paid £1,000 for a new ticket, reached work in time, and claimed his costs from his insurers.
You and I have no reason to linger over the small print. A pity, though, that he never did. Suffice it to say he was not properly covered.
Well of course not. I wish I had shared with him then my doubt that he would be covered. The reasoning was simple, can be applied in most areas of risk in life and was this: if there’s a good chance of the thing against which you wish to insure yourself happening, then unless the premium is hefty you can be pretty sure that the small print will exclude it.
This stands to reason. The travel insurance in question had cost less than £100. Being forced to buy a new ticket because for some unavoidable reason the original ticket won’t do, is something that happens to us all. If cheap travel insurance covered such eventualities the company selling it would soon be bankrupted. So instead insurers offer fabulous payouts for fabulous disasters, and in the small print careful disclaimers for all the predictable mishaps. An elderly lady I know who took out a comprehensive insurance policy against plumbing problems recently claimed for the costs of getting a jammed roof-tank float-valve fixed — only to discover that this was specifically excepted in the small print. It is, of course, the single most common domestic plumbing problem, except perhaps for dripping taps: no doubt they are excluded too.
But I am not about to have an Esther Rantzen whinge about “rip-off” insurance companies. They have no alternative. The problem is generic. All insurance is inherently a rip-off because in order to remain solvent any insurer (or lottery, casino or bookmaker) must pay out in claims’ settlements substantially less then they receive in payments from their customers. I am not suggesting that insurers shouldn’t offer the wares that they do; I am asking why we buy them.
There are three categories of the insured: those who make an honest claim; those who make a dishonest claim; and those who in the event make no claim at all.
The last category, overwhelmingly the most numerous, lose all their money. The beneficiaries of this loss are far smaller in number and include successful claimants (honest or dishonest), the directors and staff of the insurance company and businesses such as their advertising agencies. Who within this food chain is acting rationally, and who irrationally? The vast majority, “no loss, no claim”, are acting irrationally. They could have calculated from the start that by investing the equivalent of their premiums in a personal savings account instead, they would be likely to be richer today. They are the lottery losers.
Honest (and successful) claimants have also acted irrationally but, like lottery winners, got lucky.
The company, of course, is acting rationally. Dishonest claimants are acting rationally. Allied to them are people such as me. I insure my house against fire because I have two open fires and a Rayburn, love candles, am forgetful, have no mains water and live half an hour from a fire station. Like a bookmaker who takes a bet from someone who knows more than he does about a particular race, my insurers make an actuarial mistake when insuring me at the modest odds they charge.
But why do the rest insure? People who insure themselves against minor losses that they could have easily sustained (insuring a new toaster, for instance) are just being silly. Their dislike of the unpredicted, and their hankering to smooth even the minor bumps on life’s road, is a neurosis and they are paying for a sedative.
One has more sympathy for those who insure against the sort of event so personally catastrophic that they are emotionally incapable of getting into perspective its extreme unlikelihood. Were we wholly rational beings we should lose no more sleep over the one-in-a-million chance of a £1 million loss than over the one-in-ten chance of £10 loss. But the latter deprives us of no sleep at all because we can understand short odds, and handle the loss anyway. Losses we could not handle at odds whose numbers are too big to get our heads around, do nibble at peace of mind.
But be under no illusion: on the basis that £1 gives a hundredth of the pleasure of £100, then a hundred people who agree to forgo £1 each, paying it into scheme to repay whichever among them proves to be the one-in-a-hundred who sustains a £100 loss, have not by their co-operative insurance added a jot to the sum total of human happiness.
Indeed, they may have detracted from it. Conscious that they are now “insured”, some may take less care to avoid mishap. This — what insurers call “moral hazard” — is the objection that from the cradle every Tory has been taught is fatal to collectivist doctrines such as socialism. And so it is. But it has just as much force against the insurance principle. Why 1,000 machinists in Salford who form a co-operative to help any of their number who falls into difficulty are regarded as collectivist pinkos, when 1,000 stockbrokers in Weybridge would consider themselves good capitalists when they take out insurance, escapes me.
Socialist collectivism transfers wealth from the industrious to the feckless. The Prudential transfers wealth from the prudent to the careless. Both transfer wealth from the lucky to the unlucky. What’s the difference? The scratchcard addict makes a small, regular payment in the unlikely hope of a single, large reward. So does the insurance policyholder. What’s the difference? Insurance is socialism for Tories. It is gambling for bores.
