Be careful when using statistics

Imagine that you are sitting down with a current or prospective customer talking about the issue of flood insurance. As you are discussing the coverage, it is conceivable that the customer may ask the following question: “what are the chances that my house is going to be impacted by a flood?”

This is a legitimate question since the customer is trying to decide whether to spend dollars on insuring an exposure. In some cases, the response may include some statistics such as “for your area to be impacted, that would take a storm like we have never seen before. The chances are probably one in a thousand.”

Essentially, you are advising the client that there is a 99.9% likelihood that their house will not be affected. Sounds like pretty good odds! As a result, the client decides not to buy the coverage.

Well, this “1 in a thousand” likelihood is exactly what the odds were with Hurricane Harvey this past year and also the major rainfall that occurred in October 2015 in Charlestown, South Carolina. Thus, one in a thousand does not mean it won’t happen. It just means that the catastrophe will happen but probably only once in that thousand-year period. Unfortunately, for some homeowners in the areas affected by Harvey and the greater Charleston, SC area, that “one year” happened probably sooner than they thought.

Tremendous caution should be exercised when discussing catastrophes and the need for various coverages. Statistics are typically based on historical data and the likelihood the accuracy of data will continue moving forward. However, Mother Nature seems to be anything but predictable.

What if during the same discussion, the client turns to you as the agency CSR and asks, “what would you do”? How would you respond? If you state, “if I were you, I wouldn’t buy the coverage”, this could heavily influence the customer’s ultimate decision. It is best to sidestep the question and advise the customer that this is a decision that they need to make, and it should not make any difference whether you would buy it or not.

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