Insurance is not the Same as Protection

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy.

A while ago during a temporary gap in my house insurance, some of my friends joked about coming over to my place and “having an accident” to make some big money. Of course they weren’t serious, and we all had a good laugh.

Later on I thought about what had made the joke funny. If you think about it, a fraudster would have better luck getting a big settlement from an insurance company than from me. So, for a short while my house was probably the worst place to target for faking an accident. But my friends and I all got the joke instantly, even though it doesn’t seem to make much sense after some thought. What is going on?

To answer this you need to look at how house insurance is marketed and sold. The best example is one insurance company that shows the image of a giant protective blanket enveloping your house. As long as you don’t think about it too much, you have the feeling that house insurance actually helps prevent accidents. The marketing promotes this subconscious idea. Of course, if you think about it, it’s clear that all the insurance does is give you money if something bad happens (that is covered). This is valuable enough, but accidents are just as likely to happen whether you have insurance or not. So, my friends’ jokes depended on our false sense that insurance somehow prevents bad things from happening.

When making decisions about what insurance to buy, it is important to keep in mind that insurance is essentially a financial matter. You are not buying protection from calamity so much as you are buying financial compensation when accidents happen.