In his book, The Flaw of Averages, author Sam Savage explores how the widely used statistical concept of “averages” can wreak havoc on our forecasting and decision making. Executive Summary Crude rule-of-thumb approaches in settling large contents claims can lead to bad-faith risks or ballooning loss ratios resulting from underpayments or overpayments, Enservio’s analysis reveals. He explains the law’s weakness by pointing out, “Plans based on average conditions are wrong on average,” and describes common, avoidable mistakes in assessing risk in sectors as diverse as healthcare, accounting, and climate change. In our business we frequently see operational rules of thumb based on such averages.
A recent example of how this plays out in the real world involved a top claims service provider for a top 5 insurance carrier. The service provider told the carrier that their data analysis showed the 250 most expensive items on a contents claim represented 80 percent of the Replacement Cost Value (RCV) of all personal property in the household.