What insurers can learn from behavioral economics
06/09/2017

Making better use of behavioral economics could help insurers sell more policies—and will help to ensure they sell the right policies to the right customers.

By Neil Cantle, Principal, Milliman.

Behavioral economics starts with the belief that individuals are not always rational. From this assumption it finds its way to radically different conclusions to traditional economists, actuaries, and marketers.

We know that people do not always buy the insurance policies they should to protect themselves and their families but the industry’s traditional response to that seemingly irrational behavior has often made the problem worse.

It has made insurance products more complex—in the name of offering more choice—and overwhelmed consumers with information, again in the name of informed choice. Regulators have been complicit in this information explosion.

It has also made a mantra out of “insurance is sold, not bought.” It doesn’t have to be like this.

Simple insurance propositions
Simplicity lies at the heart of behavioral economics and many InsurTech innovations are pointing the insurance industry in the direction it should be going.

Simpler propositions such as plain-term assurance combined with a new approach to the language used—replacing “premium” with “cost” for instance—are aimed at guiding consumers to the right decision when looking at insurance products.

This involves something the economists call nudge theory, which just means taking a simple, step-by-step approach to get them to the right conclusion.

This simplified approach is well-suited to the tech-led mobile revolution, where the focus is on the truly essential information, often using artificial intelligence to engage with consumers so they aren’t asked for information the insurer already knows.

This is a key element of many InsurTech propositions and is all about giving the customer a great experience when buying insurance. Ultimately, it stands a better chance of leading to a “buy” decision.

Challenges of transforming insurance process
This transformation of insurance buying and selling processes isn’t without its challenges.

In nudging consumers along the decision-making process, insurers will hope to sell more policies but they must be the right policies for the right people.

This means creating models of normative behavior that are ethically sound and are highly responsive to subtle changes in consumer behavior.

It requires a more dynamic and flexible approach to product development and distribution strategies than many legacy insurers might feel comfortable with.

This journey toward a new world of simpler products and more focused sales strategies will have to be made hand-in-hand with regulators.

The new models are grounded in the belief that better consumer decisions are made through the provision of more information, not less.

If insurers get back to basics, moving away from complex multi-option products, then the conversations with regulators about streamlined sales processes will become easier.

Tech opportunities in health and life insurance
Complexity is the real demon the industry has to confront.

This doesn’t mean that margins will be squeezed, as educating consumers and helping them make the right decisions will be happening in the context of the development of entirely new ranges of products.

Many of these life and health insurance products will only exist because of technology, such as wearable health and fitness monitoring devices.

They are creating new opportunities for microinsurance products that will focus on the risks that the wearables will make people more aware of.

For many traditional insurers, exploiting these opportunities will require a radical overhaul of processes, distribution strategies, and, most crucially, product development.

The whirlwind of innovation sweeping across financial services with behavioral economics at its heart means that there is no option but to embrace this spirit of change.

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