Several years ago, a colleague said that ‘no one wakes up in the morning to buy insurance’ in an attempt to explain the reasons for an ever-anaemic demand for insurance products. Over the years, this phrase has become popular among neo-insurers and those trying to change how insurance is traditionally viewed.

While the notion is generally true, let’s examine why people do not buy insurance the way they buy other products and services, although everyone is exposed to a plethora of risks every day, ranging from waking up with a fever, having a road traffic accident, becoming a victim of a street crime or even losing our jobs.

The first issue is of ‘if’ and ‘when’. Insurance by design is an ‘if’ proposition — for example, if a person is hospitalised, the insurance product will pay for treatment costs, or if a smartphone is lost, insurance will compensate, and so on.

On the other hand, people mostly deal with things ‘when’ they are needed or wanted, such as drinking water when thirsty and taking a painkiller when having a headache.

Insurance is not purely an investment tool; it is a plan of payout for undesirable possibilities

It is unimaginable or perhaps practically hard for someone to drink ten glasses of water in one go to cater for a situation ‘if’ they do not find water throughout the day. Customers who are wired to do things when there is a need or want, find it difficult to buy insurance, which comes into action if certain unforeseen events happen.

Insurers try to dilute the ‘if’ part by baking insurance in other products such as investments and changing the narrative like ‘when a child goes to college, the policy will pay a certain sum of money’ or ‘when a person retires, the policy pays to support post-retirement financial needs’.

Undoubtedly, this is a smart move, but at times, it leads to customers blaming for being tricked into insurance packaged as an investment when compared apple to apple, such products at times perform lower than a pure investment plan primarily due to high upfront distribution costs charged to insurance premiums.

In the modern insurance business marked with digitalisation, forward-looking insurers are strengthening ‘when’ part more sophistically through innovations like on-demand insurance, such as activating accident insurance while hitting the motorway or usage-based insurance products, such as paying car insurance premiums only for the kilometres driven.

To be clear, these concepts change the positioning of the product placement, but the inherent nature of ‘if’ stays there since insurance’s nature as a product is to deal with eventualities that may or may not happen and the ‘if’ angle is inseparable.

Another interesting aspect of humans is that people are generally positive and optimistic about the future; brains are wired to believe that tomorrow will be better. Insurance is a risk transfer mechanism, and every insurance selling conversation always involves the part about something bad happening in the future. People do not like and appreciate that part and make every attempt to get out of the conversation. This again results in avoidance and less demand for insurance.

The other issue is of the products pushed by some insurance companies that do not always take into consideration the ground realities faced by the end-users.

Customers are rational and generally buy things that they are convinced will solve a problem they are facing. A bunch of insurance executives sitting in their cushy offices deciding that their products are the best for customers without their input will not make good products.

It is like creating a solution and then finding the problem it solves. It should work the other way around, where products are designed only to solve the problems customers are facing, and the response will be different.

The next issue to examine is again an inherent trait of insurance, and that is the contribution by many to benefit a few. The business of insurance is created where the organiser, normally an insurance company, collects and accumulates small sums called premiums from a large number of customers called policyholders.

The accumulated fund pays for legit claims for defined losses sustained by some policyholders but also a number of other costs relating to distribution, management and administration expenses, government taxes and, of course, profit for the shareholders.

For example, suppose that out of 100 customers buying health insurance policies, three to five will end up in a hospital bed and get paid a claim. In that case, a majority will be disgruntled or consider the decision of insurance purchase as a waste of money.

In my experience, the minority who get paid chase us to renew their policies, and the majority who stayed healthy and did not need financial support offered by their insurance were hard to convince that not claiming this year does not mean that they may not need their insurance next year.

Lastly, some Pakistanis are risk-takers by nature and insurance, a risk protection tool, can only be popularised if one is ready to recognise risk and dread its vagaries.

Riding motorbikes without helmets or despising the idea of wearing seatbelts while driving cars or, extremely incredibly, flocking to the seaside to witness a cyclone are remarkable examples of our attitude towards risks and explains a lot about why we do not wake up thinking about buying insurance.

The writer is an insurance professional based in Pakistan

Published in Dawn, The Business and Finance Weekly, October 9th, 2023