How our decisions are influenced by the latest disaster on the news
The probability of our houses being destroyed by fire or flood is extremely low. Most of us likely don’t know anyone who has recently suffered from this disaster. If we don’t see it happening to anyone else, we assume it won’t happen to us either.
Traditional economic theory tells us that people make rational decisions based on the likelihood of an event occurring. Prospect Theory, a behavioural economics theory developed by economists Daniel Kahneman & Amos Tversky, says that when the probability is extreme, our minds either overweight or underweight that probability.
Every summer we are hit with another bushfire and flood season. The 6 o’clock news is filled with tearful stories of loss. A friend of a friend of a friend even lost their house, didn’t you hear? Now, because of these communications, we begin to ‘overweight’ the probability of our house being destroyed, and we rush out and buy insurance.
In this way, although bushfires and other disasters require insurance companies to pay out a huge number of sudden claims, there is a shiny silver lining for them.
Imagine a world where there were no natural disasters, where bushfires and floods weren’t on the news every summer evening. This is a world where insurance companies would never need to pay out insurance claims. If there’s no reason to pay a claim, there’s no reason to get home insurance. People would stop buying home insurance and insurers would need to begin selling more travel insurance instead.
This shortcut, where we rely on the information most accessible to us, is called the availability heuristic.
Availability heuristic in travel insurance
Imagine if you were buying travel insurance 12 months ago, aka pre-coronavirus.
Let’s say your insurer offered you a free optional cover with your policy. You could choose only one of the two following options:
- Terrorism
- Pandemic
Which would you choose?
Most people would select terrorism.
Why? Because every night on the news we see reports from other countries of terrorist attacks creating havoc and destroying lives.
Why does terrorism exist? Because it works.
The number of deaths caused by terrorist attacks are extremely low — in 2017, 0.05% of all global deaths were caused by terrorism. When a terrorist attack occurs, the result is that we lose many of our civil liberties as governments strive to make us feel safer through extra precautionary measures.
Everyone is thinking about pandemics now
Prior to this year, when was the last time we saw a life-changing pandemic?
The most recent overseas pandemic was the swine flu in 2009 (H1N1), which killed an estimated 285,000 people. But the deadliest pandemic of recent times was the Spanish flu of 1918 (also H1N1), which was responsible for the deaths of an estimate 17–50 million people.
And then in 2020, COVID-19 changed all our lives. There has not been a news bulletin since March that does not contain a story related to the virus.
Now, imagine two years into the future where overseas travel is back on the cards.
It’s time for you to buy some travel insurance again.
If your insurer gave you the same 2 options presented previously, which would you choose now?
- Terrorism
- Pandemic (excluding claims caused by COVID-19)
It’s a bit tougher, isn’t it?
Insurance makes us feel safe
The goal of insurance is to make you feel safer, and travel insurance enables you to feel confident and forget about the risks. For this reason, a travel insurance policy, in theory, should protect you from the things that are most front of mind. That is, your policy really should contain both terrorism and pandemic cover.
Finity, an analytics consulting firm, collated data on Australian travel insurance policy wordings and found that pre-COVID, 60% did not cover cancellation for pandemics. They also found that about 25% wouldn’t even cover medical costs arising from a pandemic.
The future of travel insurance
Expect to see those percentages decrease in the coming months under pressure from regulators and customer advocacy groups.
What we are likely to experience is a similar pattern for travel insurance that we see almost annually with home insurance. That is, when the planes start flying again, the proportion of travellers taking out insurance is likely to increase above pre-COVID levels.
While this may come as little consolation to the travel insurance industry right now, it does make the future appear potentially a little brighter.
- Did you claim any travel insurance due to coronavirus?
- Have you gone out and bought insurance after seeing a disaster on the news?
- Have you ever checked your insurance policies for pandemic or terrorism cover?
