Insurance and behavioural economics – A valuable toolkit

Have you ever been surprised at the way people behave? You’ve built a great new product or customer journey but then people don’t do what you were hoping for. Will people click on the link? Will they buy the policy? Will they tell the truth about their health status? It turns out we’re not very good at knowing what drives our customers’ – or even our own – behaviour. Behavioural Economics offers some answers which is why insurance and behavioural economics go hand in hand.

First things first: what is Behavioural Economics?

Most of the time, we assume that when faced with a choice, people will weigh up the all the costs and benefits of each option before making a rational decision. In insurance, this would mean that people accurately work out for themselves what risks they are exposed to and then take out the appropriate levels of coverage to protect themselves. The trouble is: we all know that this is not how people actually behave.

When we observe people’s behaviour in real life, it’s apparent that we do not always make decisions that follow this “rational” model. Instead, we are prone to behavioural biases and our behaviour is heavily influenced by the context we find ourselves in.
The field of Behavioural Economics (BE) helps us to understand and explain the hidden forces behind our human behaviour. It explains that we have two different ways, or “systems”, that are responsible for our thinking processes and decision-making: ¹

• System One makes decisions automatically and unconsciously. This system is responsible for more than 80% of decisions and for this reason it makes them quickly. To do this, we use heuristics or mental “rules of thumb” which act by simplifying complex decisions.
• System Two is the reflective, slow and deliberative system with limited capacity. This system is used when processing complex information or calculations.

Here’s the thing: we tend to assume that people will be in System Two thinking when they consider our insurance offer – but in reality people spend most of their time in System One thinking – meaning that they easily can, and do, simply rely on mental shortcuts. For example, we typically see that the demand for flood insurance increases after a flood because this risk is at the forefront of individuals’ minds.

How is behavioural economics used in iptiQ?

1. Creating uplifts in desired behaviours through continuous optimisation: by harnessing psychology and behavioural science in the way that we frame our messages to customers, we have demonstrated significant improvements at every stage of the customer journey. In rigorous A/B tests, we’ve found that small adjustments to emails, letters, landing page or scripts have led to significant uplifts in sales or retention. In one instance, we were able to reduce health insurance cancellations by 33% by reframing the wording of the renewal letter with more of an emphasis on the value of the coverage.
2. Improving underwriting journeys: across multiple trials, we’ve seen that behavioural insights can make it easier for customers to answer questions during the underwriting process and provide truthful answers. With one of our partners, we achieved a ten-fold increase in disclosure from the group that displays the highest level of alcohol consumption. How? Simply by making some small changes to the way the question was framed. Instead of asking individuals the traditional and cognitively draining question of “How many units of alcohol do you drink on average per week?”, we asked “How often do you drink alcohol?” and paired this with a behaviourally-informed range of options including daily, most days, two or three times a week and so on. By being provided a high anchor, individuals are in a much better position to give an accurate and honest answer.
3. Building intuitive, human-centric and contextual insurance propositions: many well-meaning insurance propositions fall flat because they neglect the importance of the context in which they will be presented. By integrating behavioural insights early on in the proposition development process, we can build propositions that harness the uniqueness of each context in order to increase the chances of sales. For example, one of our partners was interested in offering their customers Critical Illness but was unsure how to position the offer. Our product development, underwriting and behavioural science team worked together to design a product that was tailor-made for the context in which it could be sold. We created an entry-level Critical Illness product that could be offered at the end of a life insurance sale on the phone. This made the offer relevant, timely, affordable and easy to buy from a trusted messenger. The result is a very strong level of interest from customers and a high conversion rate to sale.

Conclusion

What we’ve repeatedly found is that it’s not always the rational things, like price or features that drive our behaviour. That’s why behavioural economics can be of such help, with its understanding that people’s decisions are not always fully rational and often are influenced by their context.

Through rigorous experimentation, behavioural economics is helping iptiQ and its partners achieve better business results by harnessing insights into how people think, which is why insurance and behavioural economics are two things we’re sure to continue talking about.

¹Kahneman, D. (2011). Thinking, fast and slow. Penguin Group: London.