February 12, 2019 by Jason Contant
Due to six decision biases, consumers will typically not protect themselves against low-probability, high-consequence events until it is too late, a keynote speaker said recently at the CatIQ Connect conference in Toronto.
When consumers decide not to purchase insurance or invest in loss reduction measures prior to a disaster, they are typically guided by one or more of the following six decision biases:
The second bias, amnesia, means that people often forget the lessons of the past, leading them to decide not to undertake necessary measures, said Howard Kunreuther, professor and co-director of the Risk Management and Decision Processes Center at the University of Pennsylvania’s Wharton School.
Kunreuther was the keynote speaker at the CatIQ conference on Feb. 5. He was discussing the book The Ostrich Paradox: Why We Underprepare for Disasters, which he co-wrote with Robert Meyer.
“People buy insurance after a disaster, by the way, not before, unless they are forced to buy it,” Kunreuther said. “Then they have it for a few years and say, ‘God, I’ve wasted all these premiums. Look at all the things I could have done with the money that I’ve spent on insurance. I’m going to cancel my policy.’”
One of the biggest challenges insurers face, Kunreuther said, is convincing consumers that the best return on an insurance policy is no return at all. “Celebrate you haven’t had a loss. Very hard to do.”
On a personal note, Kunreuther said he bought his first set of battery cables only after his car didn’t start. “Battery cables weren’t part of my agenda when I bought my first car many years ago.” Generally speaking, people focus on the losses after the disaster, not beforehand.
Besides amnesia, five other biases play a role in being underprepared:
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