Andrew Hague believes that actuaries should take a lead role in improving the way the financial services industry engages and communicates with its customers
The way in which financial services companies communicate with their customers in helping them understand financial products and concepts has often come under scrutiny. In the UK this will become even more critical as a result of regulatory changes such as the Retail Distribution Review and pensions reform. These changes could result in more customers making investment and pension decisions without access to financial advice.
In recent years, improvements have been made in the readability of consumer information, for example, through the use of 'plain English' language - but are we doing enough to communicate financial products and concepts to customers?
For example, a 20-page, caveat-filled, number-heavy document landing on a consumer's doormat is unlikely to engage them, no matter how well it is written. It is key that communicators step back from focusing solely on the content of the message and plan how to position their information to best engage the target consumer.
On 15 January 2011, The Times published the following statement: " the arcane lingo of pensions is not just the inevitable consequence of precise people (actuaries) colliding with the messy real world. It is more sinister than that. Opacity, complexity and jargon have sometimes been deliberately introduced into the system the more easily to bamboozle and overcharge the unwary."
Rather than being part of the problem, actuaries are uniquely placed to lead a transformation in consumer information, thanks to our technical expertise, wide-ranging industry roles and duty of care to society.
If we can engage better with consumers, we will see improved outcomes for consumers. Information will be more closely aligned to their needs and presented in a more engaging way, leading to better financial choices.
The financial services industry will also benefit - through higher sales, retention and profitability - by reaching out to consumers in a way that resonates, so increasing the value they place on the provider's offering.
The Actuarial Profession's Consumer Information Working Party has recently published a paper that explores how we can better engage consumers. They have analysed the current state of consumer communications and propose a framework for the future. They also recommend a set of key steps for improvement - some of which involve you.
One factor they consider is how to better apply lessons from behavioural economics - the study of the role that social, cognitive and emotional factors play in financial decisions.
Information overload and complexity
We know many people are daunted by information that appears complex, and will not have the patience or confidence to read and digest it. Information overload is a particular risk when the consumer needs to actively monitor whether their investment is on track to help them achieve their goal. It is a barrier to understanding and likely to lead to misguided action from the consumer.
One solution is to keep options to a minimum. This can be illustrated by an example from the US. In an experiment (by Choi, Laibson and colleagues), the authors simply reduced the number of options in a pension from many down to two. This had the effect of doubling enrolment.
Regret and loss aversion
We know most people are much more sensitive to investment losses than gains. As a result, investment falls can lead to savers cancelling their policies soon after the policy is taken out. This may not be the best option as the policy could still be on track to meet the customer's savings goal. The best way to mitigate this effect is to communicate investment performance in terms of progress towards long-term goals.
We urge the Actuarial Profession to take a lead in this area. The Profession has an opportunity to make good use of its core skills and to help put consumers at the heart of how we communicate. This will help us achieve one of the aims of the Profession's strategy: "To speak up on relevant matters of public interest and to raise awareness of the work of actuaries and the value we add to society."?
FIND OUT MORE
The working party's paper can be found at: http://bit.ly/ConsumerInfo