nsurers profit while you gamble. What are the odds that your beneficiary will receive, say, a life insurance payout? Imagine if insurance was sold by bookies at a race track. You as a punter could walk through the bookies’ enclosure and check the odds on insurance contracts: life, permanent disability, funeral, property, motor vehicle, health, flood, workers’ compensation, professional indemnity, etc. But what are the chances your beneficiary will get a life insurance payout? Paying for insurance is like betting on a horse, with one enormous difference—you aren’t told the odds.
Insurance companies’ lists of starting horses are long, and there are many races and racecourses, with no end of glossy colours. But none of lists show you the odds. They never do.
According to some, free markets work best when accompanied by the free flow of information. This is certainly the view of the Pig Flying Economics Department in your local university. But outside that esteemed department, things work by different rules, especially in the insurance industry where withholding information is the key to market success.
Take a simple example: life insurance. When you take out life insurance, it’s a gambling contract between you and a life insurer. You gamble on the possibility of your dying before the next premium is due, and the insurer takes your money. But what are the odds? Unless you have access to actuarial tables (the form guide used by insurance companies) you don’t know what the odds are. You won’t get the form guide—it’s ‘commercial-in-confidence’.
Most financial advice comes from financial advisers. They generally work hand in glove with insurance companies, and get a commission on every policy they sell. Why on earth would they tell you the odds?
Think about it: what are the odds of your dying in the next twelve months? A lot depends on your age, of course. If you are in your mid-twenties living in the developed world, the odds are far less than one in ten thousand. These odds will shorten as you get older, but even in your early 60s it’s still only one in a thousand. If you put the money in a savings account instead of the insurance gamble, you are likely to still be around to enjoy it when you retire at 65.
In Australia, financial advisers are legally required to act in your best interest. Yet they keep selling insurance!