For several hundred years inventors and scientists have dreamed wistfully of creating a perpetual motion machine. The theory being that it is possible to design a machine that creates more energy than it uses, and therefore runs perpetually. Such attempts are normally characterised by a strange combination of rolling steel balls and spinning wheels cobbled together in a half-baked attempt to harness gravity and convert it into useable energy.
It is obvious that none of these hopeful inventors have ever been parents otherwise they would have known that the secret to guaranteeing perpetual motion is to simply put a toddler in a barber's chair. Just lashing a few chairs together and harnessing the energy created would make Sellafield seem about as productive as a windmill.
If you could build such a machine (the perpetual motion one, not the child slavery barber chair) then you would also solve the world's energy crisis at a stroke and a Nobel prize would surely follow. But before you dash off to your shed with the kid's marbles, a colander and some four by two, it’s probably worth mentioning that it can’t be done. If you do actually succeed then you will likely be ran out of town by villagers carrying pitchforks, convinced that you are in league with Lucifer.
The 17th century mathematician Blaise Pascal spent an awful lot of time trying to create a perpetual motion machine, in between developing mathematical theories such as Pascal’s triangle, much to the dismay of maths students ever since. They should probably be a bit more grateful as he also invented the world's first mechanical calculator which probably made up for torturing their minds with a triangular array of the binomial coefficients in his self-titled triangle. Maybe.
Despite the fruitless folly of his pursuit of perpetual energy, one of his attempted inventions turned into something that is still very popular today. He created a spinning wheel with a groove around its perimeter in which a ball-bearing could be spun in the opposite direction. The idea being that each would power the other and it would run forever. It didn’t. Time after time the ball lost momentum, fell off the wheel and settled around its spindle, which just happened to have grooved notches in. The dejected Pascal consoled himself by trying to guess which of the notches the ball would eventually fall into; and roulette was born.
The game is simple. A grid with 36 numbered squares is drawn out on a table and you bet your money on which corresponding number you think the ball will land in on the roulette wheel. Guess correctly and you win 35 times the amount of your stake. That means that statistically, for every £36 you bet, you will win £35; which is the definition of having the odds stacked against you. A bit like an argument with the wife; the longer that you keep going for, the more it will cost you in the long run.
When it comes to a business model, the casino is no different to an insurance company. It is the art of calculating the odds of an event happening under a certain set of circumstances that dictates whether you make a profit or loss. Where it is different is that roulette is a game immersed in glitz and glamour and a tool of seduction for British Secret Agents whilst insurance is just plain dull. James Bond may not have had the same allure with the ladies if he invited them to spend his money by completing his home insurance form.
There is one occasion when insurance isn’t dull though. That’s the day that you need to claim. Immediately it becomes the single most exciting thing in your life and you become the king of the small print, desperately scouring the policy conditions hoping beyond all hope that your particular calamity is covered and finding out, invariably, that you’re not covered for what you thought you were covered for.
This scenario is inevitable as long as human nature dictates that when we purchase our policy we want it to be the cheapest possible and when we claim on the policy we want it to be the best. It is much like when the kleptomaniac married the police informant. It was never going to end well.
The way we view insurance has also changed with the advent of price comparison websites. Now, we can compare quotes at the click of a button and price is everything. That is why they are called price comparison sites and not best policy comparison sites. Let's face it; who ever clicks on anything but the lowest premium?
Consequently, in the modern world insurers are all desperate to provide the lowest quote in order to get to the top of the list. The problem is that no matter what price they charge, it doesn’t change the likelihood of a claim happening. Whether you pay £100 or £1,000 for your premium won’t change the underlying odds of whether you will die, crash your car or get burgled.
The casino’s had the same problem with roulette. No matter how good or bad the casino was, the profit level was dictated by the odds. For every £36 staked by the player the casino stood to make £1, which worked out about a 2.3% margin.
And so they decided to change the odds by adding another number to the board. Meaning that for every £37 staked, the hapless punter would win £35. But, instead of adding the number 37, they added a zero. The reason being, that if you ask people how many numbers there are on a roulette table, most will say 36. In their mind, they then think of the odds being 1 in 36 instead of 1 in 37 (including the zero). This minor change doubled the Casino’s profit margin to over 5%.
Their spiritual brothers in the insurance industry do not have the luxury of changing the odds of an event happening that they have insured against. They cannot just add another number to the table. So if they need to reduce their price to ensure they are top of the ‘best buy’ tables and they cannot reduce the odds of a claim being made, then the only place they have left to go is.....reduce the number of payouts made.
And so the games begin, increasing the excess on motor policies which pretty much rules out any claim other than a total write-off. Tightening the definitions of health policy conditions. Did you know that cancer isn’t cancer anymore? No, in order to claim you must have the right type of cancer, and a personal favourite, the flogging of Reviewable Rates on term life assurance policies.
This is where the premium they quote, to get to the top of the tables, is only fixed for the first five years of your life insurance plan. After that they can increase it each year to whatever they like. So, when you get older, and more likely to claim, they increase the premiums to a level that is obviously unaffordable and you have no option but to cancel it. They get to keep the premiums you paid when you were young and healthy and you get left without any cover when you actually need it.
It’s a bit like the budget airlines that start off with a price so low that you wouldn’t think a pigeon could fly to Spain for, yet by the time you have finished your journey you realise that you could have chartered Air Force One for what it actually cost you in luxurious add-ons -like a seat...and the fuel.
So, for all the benefits that comparison sites bring, maybe the 19th century architect William Ruskin was referring to insurance when he noted that ‘There is nothing in this world that some man cannot make a little worse, and sell a little cheaper, and those who consider price only are this man’s lawful prey’.