March 4, 2016

To a greater or lesser extent, every transaction involves a winner and a loser. If we knew in advance – or had a good idea – which one we were going to be, we’d probably want to take a view on whether we went ahead or not.

Most of the time we’re guessing, of course. Most of us guess optimistically. If we didn’t, the wheels of commerce would be grinding a good deal more sedately. But the fact remains that for every winner there’s at least one loser – sometimes many thousands.

Given that we do crazy things like playing the lottery, getting married, or riding motorcycles, it’s obvious that rational calculation plays only a limited role in human decision making.

But when it comes to money, we like to think we do things differently. Underwriters attempt to make rational decisions about deals involving money on a daily basis. Some do better than others. Luck and judgement are both involved.

The trick is sizing up the odds, and given that there’s b*gger all money to be made from investing in things these days, underwriters have belatedly got all serious about this. This requires information. The more of it the better, so the theory goes.

Insurance was recently branded “evil” for wanting to know everything about everybody all the time, in order to avoid the ‘bad risks’ – in much the same way that governments get flack for seeking to do something similar in order to identify the ‘bad guys’.

Modern technology offers almost unlimited potential for gathering up and doing clever things with data. Omniscience beckons. But having the data and acting on it, could stop us doing all kinds of things – and not just selling affordable insurance to dubious individuals.

Devil-may-care entrepreneurialism is under threat from information overload. In a data-rich world we get to see where hidden risks lurk. We’re less likely to lose out. But could it also be harder to win to the extent that it seems worth bothering any more? Are we headed back to dreary old barter, but with added data overload?

If goody-goody regulator FCA gets its way, insurance buyers will soon be almost as evil/well informed as insurance sellers are threatening to become.

Having got its knickers in a twist over a bunch of losers being (more or less knowingly) sold add-on policies they were highly unlikely ever to claim on, the regulator is now threatening to give insurance buyers a ‘scorecard’ indication of whether they’d be wise to buy a particular insurance product, in the same way those inscrutable ‘traffic light’ labels are meant to tell you how fast various processed foods will kill you.

A pilot has been announced that will see ‘a small number of products’ trialled with scorecards telling prospective purchasers how they might ‘respond to claims’. But wasn’t finding out how your insurer responded to a claim always part of the fun? Would people really want to spoil the surprise?

To the threat of insurance disappearing from above, as well-informed insurers politely decline, we must now add that of insurance disappearing from below, as punters opt not to bother with products where the published claims ratios, claims acceptance rates, claims frequencies and average pay-outs don’t stack up.

How can that be fair? How, in this brave new world of TMI, are insurers expected to make up for all those unintentional loss leaders by flogging the odd overpriced claims-free cash cow here and there?

A little knowledge is a dangerous thing, they say. Just think how much worse a lot of knowledge could be.  There’s a reason the bloke with the beard told Adam and Eve to leave that apple on the tree.

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