Understanding Behavioural Dynamics in Insurance – Purchase Decision

Behavioral economics (BE) has been a major area where we have seen increasing academic focus and substantial improvements in last decades. BE uses psychological experimentation to develop theories about human decision making and has identified a range of biases as a result of the way people think and feel. According to BE, people are not always self-interested, benefits maximizing, and costs minimizing individuals with stable preferences—our thinking is subject to insufficient knowledge, feedback, and processing capability, which often involves uncertainty and is affected by the context in which we make decisions.* 

Today i will elaborate on understanding consumer behavior at the purchase and underwriting phases and how to improve it. In my next articles i will talk about behaviors and decision making mechanism of consumers in claims phase and how to improve and possibly direct it.

Insurance is basically a commitment for providing a coverage and/or set of services in case of a damage or loss triggering event occurring and thus differentiating from other services industries. In traditional services industries services simultaneously start following purchase decision of consumer and is usually more straightforward and easy to understand as the need is mostly designed and demanded by customer him/herself and Therefore a possible dissatisfaction occurs from the gap between expected and offered service levels rather than definition or interpretation of these services.

In insurance even in simplest retail products consumers mostly do not either have a sufficient information about the conditions of the policy or a predetermined realistic level of expectation on services which will be offered in case of damage. This usually results in an information problem which either leads to an inflated expectation together with wrong or deficient / over coverage choices. Long, technical contents of coverages written in old legal language  making it mostly impossible to be read - and therefore not read – also contributes to asymmetric information and difficulty of setting a right expectation.

This brings us an early conclusion leading question, are insurance products designed to be simple enough or easy to understand or, are insurers taking enough time and effort to make insureds understand conditions of coverages and features of services and provide clear guidelines of behaviors in case of a claim ? 

For me - as almost a 15 year Insurer the answer is NO. 

Insurers should definitely focus and invest on processes to give a clear and full information to consumers in insurance products from simplest home to complex all risk policies. This will help customers to establish a balanced and true expectation and a higher awareness for additional coverages needed and therefore less frustration in case of damages.

Digitization now offers new possibilities for insurers to build a new and interactive information bridge with customers and communicate features of products in a more simple way so as to be fully understood and digested by consumers.

Insurers can help customers,

-         to better assess their risk with remote risk inspection assistance and make insightful recommendations,

-         to provide brief, lean and more simplified versions of products in digital formats,

-         to provide live or AI supported chatbots for QNA purposes whenever needed

-         to create a more interactive relationship and increase touchpoints thanks to assistance services even if no damage occurs.

-         to offer platforms to insurers to monitor and interact in end to end customer journey

All these efforts will create a seamless experience and help decrease the information gap between parties and lead to a more aware purchase decision which will ultimately limit expectations mismatches and increase customer satisfaction.

* Sources: https://www.behavioraleconomics.com/resources/introduction-behavioral-economics/