Page 41 - MC14326 all pages
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The South African Insurance Industry Survey 2016 | 37
What is the hypothetical potential Actual value of risk: Perceived value of risk The insurance market could
value of the insurance industry? Probability of loss x amount lost: Probability of gain x amount gained hypothetically continue to grow until
In his book Kahneman goes on premiums decrease enough to let this
to explain the risk averse nature 50% x 100: 50% x 150 ratio reach 1:1.5. This will then include
of people. The participants were 1: 1.5 to 2.5 the least risk averse people.
asked if they would take a bet on
the toss of a coin (50/50) for which Claims (value at risk x probability of loss): Premium (100% probability)* This ratio only takes into account
they stood to lose R100. They were Claims ratio Per FSB report the risks that are currently covered
offered increasing winnings until 61%:100% by insurance contracts. People also
they accepted the bet. At a level 1:1.64 rely on other measures including
where they would win R110 and lose preventative measures (e.g. alarms)
R100, barely any of the participants *Ignoring cash back provisions and diversification of risks to mitigate
accepted the bet. It quickly became risk. This is where the trust in the
clear that people are not as rational insurance industry and a legal system
as was always presumed. necessary to enforce contractual
agreements comes in. This would
The rational decision-maker would make those at risk more or less likely
accept a bet even where the to use insurance contracts compared
winnings are R1 more than the value to other methods. A strong financial
at risk on a 50/50 bet. In reality this services industry can also serve as
did not happen. It turns out that the a gateway to more insurance with
pain of losing R100 is greater than bancassurance becoming more
the joy of gaining R110. prevalent throughout Africa.
They continued this experiment and The minimum value of the
came to the conclusion that people total risk mitigation market:
have a loss aversion ratio of 1:1.5 to
1:2.5. This means that on average a Total assets x probability
person would risk R100 on a 50/50 of loss x 1.5
bet if the winnings are between
R150 and R250. Another way to grow the market at
the 1:1.5 point would be to substitute
This ratio can be seen directly in non-insurance risk mitigation factors
the insurance industry and can be with insurance-based methods.
used as a tool to see if the market is
saturated or if price decreases would Has the South African reinsurance
persuade more people to take out market reached saturation? Is
insurance. It is important to note that there room for expansion based on
the average insured person does not premium reduction or should insurers
know the probability of loss. strive to replace other risk avoidance
methodologies with insurance?
