How behavioural science can shake up insurance. Ciara Izuchukwu explains
Behavioural science (BSci) is a hot topic, with universities, governments and companies using behavioural economics to guide the public into making certain choices. But what is it? Simply put, BSci helps us understand human behaviour and how it impacts our interactions, including our thoughts, decisions and actions.
Older traditional economic theories teach us that people act rationally – for example, that when making a decision, a normal person will choose the option that maximises the outcome while minimising the cost. This makes perfect sense in theory, but people behave a lot more irrationally in the real world. In fact, research suggests that decision-making is 10% rational and 90% emotional. BSci can help both customers and insurers in several areas, including product design, sales and marketing, underwriting and claims.
One way in which BSci can be used to change our actions is via techniques such as nudging. This influences people’s behaviour in a positive manner without restricting their choice. For example, placing healthy food options at eye level in a shop may encourage people to eat more healthily, without actually banning junk foods.
Governments have been embedding behavioural insights into policy. Following the publication of Richard Thaler and Cass Sunstein’s book Nudge, the UK government set up a Behavioural Insights Team, commonly referred to as the ‘Nudge Unit’. Several governments use nudges to encourage people to make better choices, such as decisions on pension savings and organ donation. But how can BSci benefit insurers?
Changes in technology, particularly the increase of online direct-to-consumer sales, mean insurers are having to adapt to a different marketplace and change the way products are sold. Unlike a flashy new watch or a holiday, an insurance product is something that people are not generally enthused to buy – which explains the protection gaps that exist in most countries. People decide against buying insurance due to product complexity, price (something most people overestimate), lack of trust in the industry, complex buying processes and failure to recognise the need for it. We can overcome many of these obstacles by understanding people’s behaviour better, helping them to overcome their biases and make good choices.
How can insurers use BSci to inform and attract customers online? Traditionally, in the case of life insurance, consumers were asked questions that brought attention to their mortality, such as: “Your family depends on you – who would they depend on if you were no longer here?” This provoked an emotional response and awakened a need that the customer did not know they had.
These tactics do not translate well online. Research has shown that people tend to react negatively when asked such questions by a Google advert – and in most cases, these types of adverts fail to grab people’s attention for long enough to generate an emotive reaction.
Research suggests that decision-making is 10% rational and 90% emotional
Behavioural science could transform this in multiple ways. It could help us redesign underwriting journeys to provide more accurate disclosure and quicker completion times. For example, it may prompt us to rethink how questions are framed on proposal forms and understand what types of question may lead a prospective policyholder to lie or exaggerate to get a better premium.
Similarly, BSci can be used to create a smoother customer experience during the claims process. Claimants have recently suffered a loss or emergency, so are likely to be stressed or emotional; BSci can be used to help insurers gather accurate information in a way that is not too taxing for the claimant.
We are entering an age in which many people do not want to be sold to – they would prefer to make an informed decision when buying protection policies. Insurance companies can help them to make these informed decisions by developing agile systems and strategies that can adapt to different buying situations, and products must be simple enough for people to understand. BSci sits at the intersection of psychology and economics, and applying its principles across products and services could lead to an improved customer journey, better sales and less misrepresentation.
Image credit | Simon-Scarsbrook
