How can Behavioural Economics drive results for Insurance?
As insurance professionals, we tend to view the world rationally. To a large extent, our industry is based on carefully measuring risk and presenting product benefits using sound empirical value.
But as consumers, there’s a degree of irrationality in every choice we make. That’s why insurance, despite being based on such rational principles, often has to be “sold and not bought” – as the old adage goes.
It’s also why investors tend to buy when the market is high and sell when it’s low. And why millions of working people continue to underfund their retirement savings – despite often being exposed to the very rational warnings against that.
In short, human choices always tend to differ from the rational “best” choices dictated by classical economics. This is due to a powerful combination of psychological, cognitive, emotional, cultural and social factors which influence every decision we make.
Behavioural Economics (BE) seeks to predict the effects of these factors and prompt changes that improve results. For the insurance industry, these changes are often in the way we communicate. But they can also affect product design, distribution, underwriting approach, even pricing. Yes, it’s counterintuitive – but sometimes, sales increase following a price rise.
“The science of knowing what economists are wrong about”
Riverside’s business partner, Swiss Re, is a leader in the application of BE for insurers. William Trump, Behavioural Science Advisor within Swiss Re’s Life Capital division, explains the approach:
“It [BE] challenges the core assumption of traditional economics – that people are rational agents who navigate the world by constantly maximizing their utility.
“Since setting up the Behavioural Research unit in 2013, we’ve run over 200 trials, where we’ve repeatedly seen that small, “seemingly irrelevant” changes can create significant uplifts in sales, retention or even truth telling”.*
Will’s reference to “truth telling” here relates to the effects that BE can have on the “Disclosure Gap”- identifying ways to change the phrasing and context of underwriting questions to boost accuracy. This can make a huge difference to the efficiency and profitability of insurers.
A regular exponent of BE for businesses of all kinds is Rory Sutherland, Vice Chairman at Ogilvy UK and author of the aptly named “Alchemy: The surprising power of ideas that don’t make sense”.
Rory refers to BE as “the science of knowing what economists are wrong about” and recommends businesses to “Test weird things, test counterintuitive things – because your competitors won’t.” **
The science of BE has developed a number of principles that can be applied to deliver significant results in a short period of time. These include:
- Loss aversion. People tend to fear loss more than they value gain.
- Framing. The exact same proposition or offer can produce entirely different results depending on the context in which it is expressed.
- “Nudge” theory. Prompting a particular outcome by using indirect persuasion in favour of it– such as “people like you tend to do this…”.
- Behavioural Economics: driving revolutionary results for the insurance industry
Life and health insurers could benefit most
BE can be particularly powerful in situations where consumers are required to consider factors they are unfamiliar with or which involve deep thinking or a high “cognitive load”. This certainly includes decisions relating to insurance, involving unfamiliar questions around risk – in particular where negative factors such as death and ill health have to be considered.
In fact, Matt Battersby, Chief Behavioural Scientist at RGA says: “There are few industries in the world where behavioural science can have more positive impact than the life and health insurance industry”. ***
Test and learn – and wait to be surprised
Successfully applying BE depends upon the rigorous application of “test and learn” methodology: making one, often small, change at a time (however weird or counterintuitive) and comparing the results of the change using a “control” sample without the change. The differences can be dramatic.
Swiss Re applies this approach to any part of the insurance customer journey where people drop out at different stages – such as the product application process. Their CEO, Christian Mumenthaler, reports: “In any process step you get improvements of 10%-30%, sometimes 60%”.****
The discipline of “test and learn” has always been a mainstay of the Riverside approach to delivering profitable customer communications programmes for our clients around the world.
Since we started in 2005, we’ve built our understanding of the psychological and emotional drivers of effective customer communication, to support the rational benefits of insurance.
Based on the cumulative learning from hundreds of carefully controlled tests, our programmes typically deliver new policy sales to 10%-30% of all customers included. And in addition, we see reductions of 12%-30% in lapse rates on existing policies held – even amongst customers who don’t make an additional purchase.