Insurance is all about assessing risk. So isn’t it important to consider how we, as human beings, approach decision making? After all, a vast majority of risks arise directly from human behaviour.
Understanding how and why people make decisions can give you a powerful insight into how hazards develop, helping to prevent them. In order to anticipate risk intelligently, you must first have an accurate understanding of human behaviour.
Unfortunately, human behaviour is unreliable. According to the traditionalists, we are all rational, self-interested individuals who logically seek to maximise our gains and minimise our losses. This simplistic definition allows economists and politicians to build models of human behaviour, but they don’t have much success in real world scenarios.
A close look at our own experiences quickly reveals that this is an illusion. We make decisions based on irrational or emotional reasoning, not just rationality. While we think we make decisions by ourselves, social influences are often much more powerful than individual thought. Habit, the comforting reliance on what we’ve done before, allows us to bypass rational decision making and stick to what we know.
For example, some people fail to acknowledge unlikely but potentially severe risks, simply because it’s never happened to them before. This has been demonstrated during COVID-19, as those who chose to not comply with the lockdown rules may have acted this way as they had not been personally affected by the virus so as they were unable to see the potential risks of their actions. This isn’t a very rational way of behaving but it’s an accurate description of how millions of people form decisions.
During the outbreak of COVID-19 there have been numerous emerging risks, decisions and sacrifices that people all over the worlds have had to make. The rules and regulations surrounding COVID-19 have given further insight into human behaviour. In March when the UK lockdown began, people were told to remain at home and stay indoors to prevent the further spread of the virus. The consequence of a lockdown on an individual’s behaviour is something called behavioural fatigue, the idea that the public would only tolerate a lockdown for so long.
There are two types of behavioural risks around COVID-19 – individual risk and societal risk. This involves the decision making process of whether individuals should balance their rights against their responsibilities and ensure that their choices and actions do not impose risks on other members of society or their own family members. Some individuals, even if they are willing to assume personal risk, are not willing to have risk imposed on them or their family. This issue will emerge as an important question in the coming weeks as lockdown continues to ease.
The idea that society is a powerful influencer in behaviour may also be another factor in why some people broke lockdown rules. Social influence complicates the risks further as individuals interact with others who may not share the same sense of risk, resulting in their decision making being influenced by others and causing them to behave irrationally.
There are mitigating factors to this irrationality. When making a decision, very rarely do we have access to perfect information. In such circumstances, basing your behaviour on what’s worked in the past, or on what’s popular among others, makes sense.
This has significant implications for the insurance industry. To cultivate a truly proactive safety culture – and thus intelligently minimise the likelihood of risk – an understanding of real world human behaviour is crucial.
This irrational side of human nature influences how and why people buy insurance. Behavioural biases can lead people and organisations to make poor decisions when choosing whether or not to purchase cover. An over reliance on past experiences can blind them to risks.
If we’re serious about understanding risk, we must face the puzzle of human irrationality. Given its obvious influence, it’s the rational thing to do.
Published date: 3rd September 2020
This note is not intended to give legal or financial advice, and, accordingly, it should not be relied upon for such. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. In preparing this note we have relied on information sourced from third parties and we make no claims as to the completeness or accuracy of the information contained herein. It reflects our understanding as at 28 August 2020, but you will recognise that matters concerning COVID-19 are fast changing across the world. You should not act upon information in this bulletin nor determine not to act, without first seeking specific legal and/or specialist advice. Our advice to our clients is as an insurance broker and is provided subject to specific terms and conditions, the terms of which take precedence over any representations in this document. No third party to whom this is passed can rely on it. We and our officers, employees or agents shall not be responsible for any loss whatsoever arising from the recipient’s reliance upon any information we provide herein and exclude liability for the content to fullest extent permitted by law. Should you require advice about your specific insurance arrangements or specific claim circumstances, please get in touch with your usual RMP Risk Control consultant or account director.
Risk Management Partners Limited is authorised and regulated by the Financial Conduct Authority.
Registered office: The Walbrook Building, 25 Walbrook, London EC4N 8AW.
Registered in England and Wales. Company no. 2989025
Risk Management Partners Limited is the data controller of any personal information you provide to us or personal information that has been provided to us by a third party. We collect and process information about you in order to arrange insurance policies and to process claims. Your information is also used for business purposes such as fraud prevention and detection and financial management. This may involve sharing your information with third parties such as insurers, reinsurers, other brokers, claims handlers, loss adjusters, credit reference agencies, service providers, professional advisors, our regulators, police and government agencies or fraud prevention agencies.
We may record telephone calls to help us monitor and improve the service we provide. For further information on how your information is used and your rights in relation to your information please see our privacy notice at https://rmpartners.co.uk/privacy-policy. If you are providing personal data of another individual to us, you must tell them you are providing their information to us and show them a copy of this notice.