Behavioral Economics and Insurance

Making and Keeping Profitable Customer Relationships

How much of our decision-making is really up to us? It turns out many decisions might be made before we can even act. When new employees were given a choice to join a 401(k) plan, 49 percent signed up. But being automatically enrolled boosted the participation rate up to 86 percent.

Traditional economics tends to study rational behavior. As actual behavior is studied more closely, however, it is clear people often act irrationally. Behavioral Economics (BE) examines how people actually think vs. how they think they think.

BE applies throughout the insurance value chain, from product design, to marketing, to sales, to claims. The sales process is one of the most compelling to explore as BE insights can help improve the process at every stage, using techniques such as simplification, bringing value forward, and reinforcing decision-making.

Simplify Choices for Consumers – and Agents

Customer interactions involving too many product options or complex configurations can cause a failure to complete the decision process. Insurers should focus on optimizing choices, not a wealth of options. Using customer information to identify and present the right set of choices can prevent consumer confusion and save agents many extra steps.

Bring the Value Forward

Consumers tend to favor near-term vs. future value disproportionately, even when future value is considerably higher. This is akin to choosing $100 today vs. $200 in one year.

Tackling these time-inconsistent preferences could benefit from the notion of hot and cold states. Consumers in a non-stimulated (cold) state make different decisions than those in an emotionally stimulated (hot) state.

Care should be taken not to provide undue influence, but highlighting the impact of being under-insured, or promoting the joy and relief of feeling secure, can appropriately address the fact that 77 percent of adults believe providing for their family after death is important, but more than 1/3 of Americans remain uninsured.

Reinforcement During the Decision-Making Process

Consumers’ selecting of auto insurance is influenced considerable by price, which may overly impact choices. Results of experiment-based surveys suggest that customers can be influenced in their perception of low price. Why? Because consumers “primed” on specific attributes will tend to emphasize those attributes in comparisons.

Respondents in a survey were asked to choose between a pair of insurance options, with varying combinations of price, coverage level, agent relationship, and claims service. About half of respondents were first asked (primed) about their beliefs in having adequate protection. Lower price was less of a decision factor for respondents first asked about adequate protection: 42 percent of those primed vs. 51 percent of those not primed chose the lower price.

When key information is presented can also affect outcomes. Lower price was less of a decision factor for respondents shown price first (vs. last): 43 percent who saw price first, vs. 51 percent who saw it last chose the lower price. i

Using the BE concept of the Bandwagon Effect, insurers can put consumers at ease with a tool that shows “what customers like you” have chosen. This can reinforce that they’re on the right track and encourage them to stick with the process to find the best solution.

Get started using a four-step process.

1. Learn about your customers (and agents, advisors). Identify sub-optimal performance areas and think outside-in to assess needs, preferences, motivations, and attitudes of customers and agents.
2. Identify behavioral interventions.Identify interventions that may change behavior and prioritize them based on business value.
3. Test hypotheses by experimentation.Design and conduct experiments to ascertain the success, value, and operational impact of interventions.
4. Enhance and institutionalize capabilities.In order to manage behavioral interventions on a scalable basis, determine and plan needed changes to the organization, processes, and technologies.

Once we understand when and where people make irrational decisions, we can impact them with new techniques and even use technology to help overcome shortcomings.

Topics Agencies