4 impossible insurance puzzles I’ve been unable to solve

A couple of weeks ago I ended my career in insurance after 4.5 years working for Australia’s largest general insurer. Before working in insurance, I knew very little about the industry and what products were available. I knew that everyone had home and car insurance, but I didn’t have either of those assets so I wasn’t really interested.

Fast forward to today and looking back on what I’ve absorbed over the years, I’ve learned that insurance is an industry of riddles and paradoxes. While I originally thought insurance sounded pretty boring, these puzzles helped demonstrate to me how interesting and challenging a job in insurance can be.

To recognise four years on the job, this week I’m asking 4 curly questions that kept me guessing.

Who wins the giant game of cat and mouse?

Insurance companies stay in business by accurately predicting how much claims are going to cost them. They only cover people when there is a small likelihood that they will need to make an insurance claim. Anyway, is it fair that a safe driver should have to pay for the insurance claims of the thrill seeker doing donuts in a Coles carpark?

Therefore, when there is an external event that causes the number of claims to rise, the insurance companies need to get in quick to stop people purchasing insurance with this knowledge in mind. We see this very often with travel insurance, where insurers will place embargoes on specific countries or even travel as a whole (COVID-19, anyone?). We’ve also recently seen insurers remove and now reinstate ‘rental default’ cover for landlords due to the pandemic. Another common exclusion occurs when someone attempts to purchase home insurance just as a bushfire bears down on their uninsured house.

How do you add a discount to a personalised price?

When you complete an insurance quote, there can be hundreds of data points used to calculate an insurance premium. After entering your home address, the insurer’s algorithm will calculate a risk score for your location based on dozens of data points it has collected over a period. And that’s only one of 50+ questions you may be asked before you’ll have a price.

A classic is the ‘no claims bonus’, which some insurers call a discount for safe driving. Using this logic for applying a discount, you would then also in theory be receiving a discount for being female, for being older, for living in a richer suburb and for driving a car that is cheaper to fix, among many other things.

In a world where every price is personalised and you have no way to compare what you’re paying to anyone else, how can a $50 discount hold any weight? How do you know that the insurer didn’t just increase their price by $50 first before adding in the discount? How do you know that they aren’t running a blitz in your suburb and have dropped prices for anyone in postcode 3052 quoting insurance? (Bonus points if you know who has postcode 3052, without Googling it)

How do you sell a product that people don’t want to use?

When you purchase insurance cover, what are you even buying? Some might say that you’ve just spent $1,500 for ‘a promise’. The promise is that when times get tough, your insurance company will have your back. But the monkey on insurance’s back is the belief that insurers are always trying to get out of paying a claim. I now know firsthand that this is not the case, but why would you take my word for it? If someone has a good claims experience, they’ll tell a couple of people maybe. If they have a terrible experience, then they’ll tell everyone they know. I feel sorry for you if you are scheduled in to attend a dinner party with them next week.

A health insurance retailer once told me, “Customers often ask me, ‘I’ve had insurance with you for 10 years and I’ve never claimed. Why am I wasting my money?’ I answer them, ‘Well firstly, you must be a really lucky person if you’ve not had to claim for your health. That is really something to be thankful for.”

So there’s this strange paradox where insurance customers only interact with their insurer if they’re paying a bill or in a bad situation and needing to claim. How’s that for negative association? Then if the customers never need to claim then they may feel as though they’ve wasted their money.

A marketer’s nightmare? Or a challenge for the ages?

How do you sell the most appropriate product without giving advice?

Selling insurance is a challenge. If a customer buys the wrong cover and is underinsured, they may end up losing their house. Due to the product’s importance and the low level of objective understanding about insurance, Industry regulatory bodies have been created. These bodies exist to keep a very close eye on insurers and make sure that customers are adequately covered. Imagine if a fast-food chain needed to check the vital signs of their customers before choosing which menu options should be available to that person.

When insurance companies provide insurance options to potential customers, they are required to consider their needs and provide responsible options. They can’t just try and sell any kind of insurance at any cost like your souvenir vendor at the local market. To complicate things further, insurers are generally unable to provide specific financial advice to customers. They can recommend appropriate products but it is up to the consumer to make the final decision to meet their needs. Some examples of decisions to make for car insurance are: comprehensive cover or just third-party, whether to insure the car at an agreed value or the car’s market value, extras such as a hire-car and excess level to pay.

Now imagine the job of an insurance website or salesperson. They need to try and make sales, while providing the right level of cover for a customer, without actually providing advice to them. Not so easy!

Do you know the answers to these riddles?

As you can see from these conundrums, insurance is a tricky product and one that can confuse not only the customer, but also the insurer itself at times. I’ve done my best to solve these puzzles over the years, but unfortunately need to hoist the white flag with these ones. Perhaps I should stick to the riddle of the sphinx instead?