Is Insurance A Scam?

Insurance is often touted to be an industry that charges way too much in commissions and fees towards consumers and that it is unjustified. But there is still a reason why insurance companies are still around and that it is also in line with financial authorities in many countries. Is it true that the insurance industry, like what some may say, a scam?

Words coming from me may be seen as a one-sided bias but let us look at things from a logical standpoint. But let us first list out the common concerns critics have:

1. The fees are too high

2. Financial consultants just sell products

3. Insurance buy already hard to claim

4. Insurance is expensive

The very first issue that weighs heavily on everyone’s minds tend to be the high fees. Yes, it is true that fees are slightly more. However, it is the lifelong service that you are paying for advice. You can read the policy documents your own, you can purchase your own insurance, and you can invest your own. It is all possible if you have studied and understood the insurance content and terminologies. Yet, why are finance professionals or actuaries still placing their funds with insurance agents?

It is time-consuming to read and compare policies. This is in which an agent you trust is there to help you decipher your needs and to advice you on the claim procedure. On the side of investments, it is true that returns will perhaps not win that of the historical returns of an index such as the S&P500. Yet, an insurance company is there to guarantee you that should any mishap befall, your investments can continue after work has stopped with experienced fund managers – safeguarding your retirement. That is the power of insurance in which we are paying a price for.

Another common concern would be the black sheep of the industry. Agents used to push products to anyone they meet for the sake of commissions. But first, it is only natural because this is what they are paid to do. As such, commissions are reduced, and regulations are set in place to curb the issue of mis-selling – including a penalty system to prevent a non-needs-based selling. Some agents also lack the product knowledge to better help their clients appropriately and thus a mismatch of needs & products despite their care for the client.

There are many great agents out there who truly care for their clients and sometimes because of that care, they may appear pushy. I am also cognisant that at times I may appear overly zealous to recommend a friend or family member that is without protection or to reduce the current costs that they are paying for in their policies before their next birthdays. In fact, when there is a promotion where some useful policies are on discount, all the more I feel the need to save them some of their premiums if possible as a bonus. But, at times, take a step back to think about the good things the person has done for you. A job does not define the person for who he is and one’s personality does not change overnight. At least, this viewpoint works for people whom you know personally.

A third point of contest would be that insurance is hard to claim. There are stories where insurers refuse to pay for certain procedures or drugs. A reason why certain line items on a bill are not claimable is due to them being non-HSA approved. The insurer is protected from unnecessary procedures or drugs given by morally hazardous doctors given that the patient is protected under insurance. This is where an agent comes in to advise clients on pre-authorisations to hospital procedures and to remind doctors that they are not to overcharge patients.

When first signing up for a plan, there is a need for financial consultants to remind clients that they are to reveal every pre-existing or congenital issues since they do affect claims processes later. Leaving one out and then resurfacing it later would pose complexities in claiming.

Lastly, insurance is said to be expensive. Let us first understand the concept behind insurance on a general basis. It is the consolidation of risks from various individuals and to then pay out to the unfortunate individual. If the expected chance of contracting an issue is 5% while the cost is $10,000, then each individual has to at least fork out $500. To pay for administrative costs and distribution costs, the value of $500 has to be increased to around $550 or $600 for companies to profit off a little.

Now, it may seem blatantly unfair and that we can self-insure considering we are paying more than our expected damage. $10,000 as a financial damage to many may not seem huge, but imagine it 10 times more, 20 times more. Can the common man absorb such a financial impact?

The cost of insurance is also spread out across the paying years of the individual as well to reduce the per-period pains of paying for their premium. For instance, if the chance of contracting critical illness is 1 out of 3 individuals, then it is only expected to fork out slightly more than 1 out of 3 during your lifetime. However, take note that it is cumulatively throughout one’s life and thus an affordable cash outlay during the premium paying years. Think of it as a pool of savings left aside for the eventual contracting of a critical illness by which upon contracting an illness, all future premiums are stopped.

In the study of human behaviours, we understand the idea of prospect theory and weighing of risks, individuals are highly sensitive to losses. It is painful to have small cash outlays over time to prevent a huge cash outlay in the future. But, we have to be aware that we will eventually claim the insurance we have set aside for in the future, we need to be willing to fork out slightly more that is spread across time rather than wake up with a rude shock with our medical bills or future unearned income loss.

And have you ever wondered why are salespeople being paid relatively high in commissions? Even more so in the insurance space? Apart from the concept of prospect theory where individuals who are risk averse who are willing to pay more proportionately for protection of a large sum, it is also because insurance agents are selling intangible products whereby the benefits come later.

Interestingly, lotteries are essentially selling paper, the same as what insurance companies do. The odds and pay-outs are stacked against the consumer. However, people still scramble and queue to buy lottery tickets. What these lotteries are selling is a piece of hope. In fact, luck-based games or gachapon games are in fact selling pixels for your money. Insurance, on the other hand, is to sell a piece of prevention against despair. When people think of despair, they tend to avoid all reason & logic and citing reasons such as the idea being too complicated or that they do not need now.

Two schools of thought in terms of psychology. One would be negativity avoidance – the idea that our minds just choose to park away all negative thoughts. Another would be the idea of immediate satisfaction. When we gamble in lottery tickets or gachapon games, we are getting instant gratification. However, insurance will only kick in at a much later date, in fact, perhaps nearer to the end of our lives and it is in fact uncertain if we would ever need to claim certain types.

Since it is so difficult for salespeople to convince people of the need of insurance, naturally the remuneration has to commensurate the efforts placed in. But ultimately, when choosing a trusted agent, it boils down to the value that the agent provides to you. What you are paying for is not the product, but for the agent.

If you're interested to chat on this topic or to exchange ideas, please feel free to drop me a message on Telegram @elijah2212, LinkedIn, or through email elijah.thj@gmail.com!

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