The value of risk
Risk is an intrinsic part of our lives – and by ‘ours’, I don’t mean just insurance companies, but ‘us’ as policyholders too.
Each group is trying to understand and manage risk every day. We insurers do it at a deeper level, assessing the probability of events, and then pricing it to arrive at the premium. Consumers are trying to manage risk too. When you are saving a part of your income, or buying insurance, you are protecting or preparing yourself to face an unforeseen but not impossible event, or to improve your life prospects in some way.
But many people do not really understand the deeper meaning of risk, and the value of the asset that they need to protect – whether it is their life, their health, or assets such as a house or car. This is amply proven by the low penetration of insurance in the country, both life and non-life.
For example, most people spend their life’s savings on a house, doing up its interiors and making it a home, yet only a few take the necessary precautions to protect that investment in case something untoward happens to it. People may spend a fortune on their car music system but grumble about the cost of the annual premium. There is little one can do about the incidence of forces majeure like earthquakes, floods, etc., but one can certainly ensure that there is adequate insurance for the home, and that there are fire extinguishers, clear exit routes, fire-retardant materials etc. to mitigate the damage.
The fundamental problem is that many people do not have a good enough answer for the question “What is the value of the house to you?” It is important to remember that the ‘value’ and ‘worth’ are different things. ‘Worth’ is just the price paid for the house, plus the cost of the interiors that can be insured – but consider the memories associated with the house. Consider the replacement cost of the house, for invariably house prices rise, and buying another house will be significantly costlier. Consider the inconvenience and opportunity costs of looking for another house. Suddenly your house isn’t just worth its market value to you.
On the same lines, what is the value of your health? Again, I’m not talking simply of the cost of the treatment, but the life experiences missed, the possible loss of income, the work promotions foregone etc. Suddenly, the quantum of the risk looks much graver than it looked initially.
As insurers, we pride ourselves on our ability to crunch numbers and assess probability, but as consumers of insurance, we must strive more to understand the true value of our possessions, our life and our health, and ensure that the protection we seek reflects that value. That is the only way for insurance penetration to improve enough to give India the protection it needs.