Insurance: Designed for the imperfect human

In a perfect world, people would claim fairly and insurers would pay out in a similar fashion. Here’s how insurance has misjudged the human species and how we’re striving to fix it.

Most businesses are built around one simple thing: human behaviour. If you know how people are going to act, you know how to give them the best service, right?

The problem is that back in the day, some very old, very “clever” people decided to lump you and I into one simple box and build multiple business models, including insurance, around it. This box even had a name: “Homo Economicus.” And even worse, this particular box expects people to be perfectly rational all the time.

In their book Nudge: Improving Decisions about Health, Wealth, and Happiness, writers Cass Sunstein and Richard Thaler describe “Homo Economicus” as a creature who could “think like Albert Einstein, store as much memory as IBM's Big Blue and exercise the willpower of Mahatma Gandhi.”

Really? Hate to break it to the economists of old, but most of our moms don’t even think that highly of us.

We can all admit to acting a little irrationally every now and again. The human species has been living on the edge with no promise of tomorrow for thousands of years. This has turned us into risk takers, gamblers and opportunists. Don’t be offended. It’s simply human nature.

We often make decisions based on our emotions, instead of seeing the bigger picture and thinking ahead.

A prime example, of course, is the way we think about insurance. It’s a grudge purchase. We don’t see it for what is is: a system that, at its core, is designed to pool money from many people to compensate the few in need.

So we’re clearly not Homo Economicus, as the insurance industry would like to believe, but has insurance done enough to appeal to what we actually are: Homo Sapiens? If they had, we wouldn’t still be trying to beat the system by claiming a bit extra here and there. Why do so many people think that it’s not unreasonable to claim for two separate small dents, as if they were both from a single incident? “Insurers make so much money,” we think. “I’d just be skimming off a tiny bit of their profits. If there wasn’t so much in it for them, why else would they make it so difficult to claim?”

If this is the way that people think about insurance, it doesn’t take a rocket scientist to realise that insurers will respond in kind: their prices will simply keep going up. Instead of trying to improve this flawed system though, many insurers have added a “solution” that completely ignores the problem: the no-claims bonus, which discourages people from claiming at all.

The bogus no-claim bonus

If you were in a small fender bender, would you forfeit an accident claim of R6 000 to get a possible R8 000 no-claims bonus in six months’ time? It sometimes feels as if this is the mindset that insurers are counting on.

The problem comes two weeks later, when you’re in a bigger accident and have no choice but to claim. Well, that original R6 000 you paid, as well as the R8 000 no-claim bonus are gone forever: just like the smile on your face.

Not only does the no-claims bonus make you not want to claim - the exact thing insurance is there for - but it can also lead to a kind of “compensation claiming”. Once you’ve forfeited a no-claims bonus, it seems logical to claim wherever you possibly can, for as much as you can, in an attempt to get your money’s worth.

So in essence, the industry that was meant to give us peace-of-mind has turned us into gamblers and scavengers. While the no-claims bonus certainly helps the insurance industry take advantage of human nature, there honestly has to be a better solution for our species.

Improving the options

Call us crazy, but at Naked Insurance, we think that people will make the right choices if you simply give them better options.

Our solution? We’re incredibly open about the fact that we only keep a fixed portion of the premiums to run our business. Unclaimed money is collectively given to charities chosen by our customers. It’s better for the individual, our collective customers and the community at large. And we don't penalise you if you do need to claim - because that’s exactly what insurance is for.

It’s a business model that “nudges” us, as insurers, in the right direction too. Because we only keep a fixed portion of premiums, there is no temptation to stop you from claiming. Simply put, there is no way we can profit more if fewer claims are paid out.

Over time, we expect more claims to be truthful, resulting in fewer unnecessary costs, like intensive investigations into suspicious claims. Lower costs mean lower premiums. And a system you don’t resent.

What we have here is an insurance designed for real people - not the Einstein-Big Blue-Ghandi warrior of textbooks. Pure, transparent, and just like Homo Sapiens all those years ago, Naked.