How much have recent events affected our perception of risks? How much are insurance firms really using this to their advantage?
Like so many people, I was riding on the tube this morning when a passing advert shocked me so much that I had to take a picture. People looked at me, a little bewildered and like my actions were odd. I am a risk manager and an econometrician. I like numbers and probabilities. These prices made little sense to me: this is because they arenonsense.
According to this advert (also confirmed on the provider’s website), the price of insuring your next three day ski trip costs the same amount as covering the risk of being stranded by an ash cloud on the days you travel. Really? Is the risk of an ash cloud stopping air traffic on the two single days you travel the same as suffering any sort of accident or injury during a ski trip?
A quick research on the probabilities of events show that “for every 1000 people spending a day on the slopes, only 2 on average will sustain an injury that requires ski patrol and/or medical attention”(Source: medical interventions statistics, ski-injury.com). This means that your risk of being injured during a three day skip trip is 0.60% (exactly: 99.8% to the power 3, not 0.2% x 3, but the difference here is so small it is lost in roundings).
According to the study Dr Graeme Swindles, from the University of Leeds School of Geography the chances of an ash cloud forming are incredibly slim: “Although in the past 1000 years, volcanic ash clouds reached northern Europe with average return interval of 56 years (plus or minus 9 years), this interval varied and can be shorter or longer. A minimum of 6 years and maximum of 115 years between events was recorded for the last 1,000 years.” (Source: “A 7000 yr perspective on volcanic ash clouds affecting northern Europe” by Graeme T. Swindles, Ian T. Lawson, Ivan P. Savov, Charles B. Connor and Gill Plunkett). This publication suggests that the risk of being stranded by an ash cloud on either of the two days you travel varies be
tween 0.0048% minimum (for clouds every 115 years) and 0.09% maximum (for clouds every six years). On average, the risk is 0.01%, 60 times less than a ski injury over three days!
Human minds have a tendency to overestimate the future risk of recent events, even if these events are incredibly rare. Studies have shown, for instance, that after terrorist attacks people are ready to pay higher insurance premiums to cover for the risk of damages caused by terrorism rather than of damages for any cause (including terrorism). In cognitive science, it is called recency bias.
Basically, it appears that this insurer is using the impact of recent events to push overpriced insurance covers. When considering risks, do not trust your sole judgement, do not trust your perception on a situation and do not be influenced by events highlighted by the media. Instead, back test them with proven data, research and compare the real chances and quantify the probability of such an event occurring.
Ariane Chapelle, Director of Consulting, Manigent.
Comments
Oh, yes. One more thing. The marketing/advertising department designed that advert. They did not necessarily refer to the actuaries or underwriters to determine what the exact cost of the insurance would be. There's a lot of variables. Typically, the advert people don't meet the actuaries. It's marketing.
Ariane, I agree with you that this company was using an advert strategy related to exaggeration and shocking. But, from being on the retail end, I can tell you that an overwhelming of consumers completely ignore the risk factors when planning their lives. It's unfortunate that a company would use manipulative tactics, but it's more unfortunate the number of people who think that, unless they know they have a health problem, they do not need life insurance for example. So many people think about buying Long Term Care Insurance when they need to be on claim, instead of buying it early when it is still available to them. Just sayin'.