Is Insurance Financial Protection or a Guardian Angel?

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Talismans, amulets, and charms are objects that may be believed to either bestow good fortune on their possessors or protect them from harm. The use of these items has a storied tradition in human history. In Ancient Egypt, pregnant women kept figurines or wore necklaces depicting Tawaret, the goddess of childbirth, to protect against miscarriage. When they turned 9 years old, boys in Ancient Rome were gifted a locket, known as a bulla, that supposedly guarded them from evil spirits and forces. Members of the Lobi tribe in West Africa carried a miniature pair of shackles as protection from capture and enslavement. Even today, owning a rabbit’s foot or hanging a horseshoe may be perceived as having a good-luck charm.

These are all examples of physical objects believed to possess magical powers. In our new research, we considered the possibility that a common financial product—an insurance policy—may also give people the sense that they are protected from harm or negative events. Unlike physical amulets, most people probably do not hold the belief that insurance magically wards off mishaps. Yet, we propose that insurance coverage causes people to feel that an insured mishap is less likely to occur, a phenomenon that we call the talisman effect of insurance. Rather than being a consequence of magical thinking, we contend that the talisman effect arises because of the way our minds work and the psychological forces that shape our judgments.

The Talisman Effect of Insurance

Suppose that you have hired a shipping company to transport a cherished possession. Perhaps you receive no further information, or you learn that you purchased full-coverage shipping insurance from an external insurance company (that is, not from the shipping company itself). In each of these scenarios, how would you estimate the likelihood that your treasured object will be lost or damaged during transit?

If you are like our participants, you would estimate the likelihood of damage and loss to be lower if you had insurance (a talisman) than if you didn’t. Previous research by Tykocinski found something similar, with people giving lower probability estimates of negative health events if they had first been reminded of their health insurance plan.

Of course, insurance does offer “real” protection—that’s why we buy insurance in the first place. But the protection that insurance offers is financial in nature—if our object is lost or damaged, having insurance assures us that we will be financially compensated. Having (versus not having) insurance may also change our behavior—for example, a driver who has auto insurance may behave more recklessly on the road. But in our shipping scenario, there is no reason why having (or not having) insurance should affect the likelihood of a chance mishap.

Anxiety and Cognitive Availability

Assuming that people do not actually think insurance has magical powers, what could produce this talisman effect? To help answer this question, take a moment and imagine how you would feel if your treasured and fragile possession was actually being shipped halfway across the country. More likely than not, you would be experiencing anxiety, and this might lead to repetitious thoughts about possible mishaps. In the terms used by psychologists, anxiety causes these negative events to have increased “cognitive availability”—they are swirling in your head and therefore come to mind very easily.

Our research suggests that having insurance reduces feelings of anxiety and, thus, reduces the frequency of these negative thoughts. Since estimating the likelihood of an event is affected by the ease of recalling thoughts about the event, insured participants end up providing lower estimates of the likelihood of a mishap.

This may help explain some of the puzzling decisions that consumers make. For example, many people buy life insurance for young children and pets, or they buy insurance to cover the cost of repairing a telephone line or replacing a broken appliance. Given that the purpose of insurance is to protect against catastrophic losses of money, it is surprising that so many people purchase insurance to guard against negative events that would not entail large financial losses. The reason is likely the talisman effect—buying insurance in these situations makes people less anxious, which reduces the occurrence of repetitious thoughts and the judged likelihood of the negative (and potentially tragic) mishaps.

We have some advice for the $1.3-trillion insurance industry. To safeguard consumers from falling prey to the talisman effect, insurance companies should avoid (or be prevented from using) overly broad protection claims that imply that insurance can ward off negative events. Advertising slogans such as “You’re in Good Hands” (Allstate Corporation) or insurance products such as Cancer Guard (iA Financial Group) may encourage the belief that insurance policies have protective powers— akin to the talismans of Ancient Egypt and Rome—that extend far beyond their actual value in providing financial compensation after a mishap.

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This post was reprinted with permission from Society for Personality and Social Psychology's Character & Context blog.