Financial planners focusing on risk advice – and life insurers themselves – should heed developments in the direct life insurance space.
While much of the recent reporting on life insurance advice has focused on advice and how planners are remunerated for this, retail life insurers also need to up their game, as Professional Planner wrote earlier this month.
At the same time, one of the new breed of direct insurers, Greenstone, which is currently pursuing an IPO, appears to be generating strong customer, revenue and profit growth. Arguably it is because Greenstone is more successfully aligning with behavioural finance principles. So what can traditional insurers and advisers learn from this model?
The behavioural gap
Several studies have identified Australians as being drastically under-insured. So, why do we fail to insure? There are a number of behavioural biases that are particularly relevant for insurance decisions, including:
1. Salience. Unless you have been through something similar with a loved one, it can be hard to bring to mind a vivid, tangible and emotional story, image or experience about your potential untimely death or incapacity. This leads us to underplay the benefits of insurance.
In contrast, annual insurance premiums can be a much more tangible reminder of their costs.
2. Hyperbolic discounting. Not only do payments better attract our attention, they are also certain and they occur in the present. Studies show that if we have experience even a small delay in receiving a reward, it can make a large difference in how much we value it. As a result of any potential benefit payments occurring in the future, they tend to be more heavily discounted in our mental arithmetic than they should be.
3. Gains and losses. As humans, we weigh losses more heavily in our decision-making than we do equivalent gains. And we weigh many small gains or losses more than the same amount experienced as a single large gain or loss.
As if designed to create the most adverse psychological impact, life insurance policies convert many small losses (premium payments) into the potential for a single large gain (benefit payment).
4. Over-confidence. Like in the example of the above average driver effect, we tend to believe that an untimely death, significant injury or critical illness only happens to others. It can be emotionally unsettling to imagine it happening to us!
5. Complexity. Insurance products can be complex, the options numerous, comparisons between them difficult, and the underwriting processes lengthy and sometimes burdensome. As a result, we can become overwhelmed, disengaged and overcome by inertia.
6. Trust. A simple solution to the difficulties we face is to turn to someone we trust. Given recent headline-grabbing cases of bad advice and conflicts of interest, for many people, the financial planning industry has lost that trust.
Closing the behavioural gap
The bad news is that, as a result of these biases in our decision-making, many Australians are exposed to potentially ruinous financial scenarios. The good news is that there is a multi-billion dollar opportunity for those insurers and advisers that can bridge the behavioural gap.
Direct insurers certainly won’t suit all clients – particularly those with more complex needs. There will always be a role for the adviser. But what can we learn from the direct insurance model?
· Tip 1: Create greater salience by using relevant, vivid emotional stories. Greenstone’s product suite includes pet insurance and funeral insurance. Regardless of the merits of the products, from a behavioural perspective, both can create a more tangible and more emotionally engaging experience for customers. It can be easier to imagine a funeral for an older person, or an expensive visit to the vet for Rex, than an untimely death of a healthy 40-something from a low probability unknowable event.
· Tip 2: Increase convenience. Small efficiencies to expedite processes or to make them clearer can often heavily influence whether people act on their good intentions. Greenstone’s more convenient (on-line/phone) sales process and quicker underwriting are likely to further reduce the up-front costs on our mental energy, and therefore limit opportunities for procrastination and inaction.
· Tip 3: Simplify options and facilitate easy comparisons. Greenstone offers simplified products. In addition, Choosi, Greenstone’s on-line comparator tool, claims to make comparisons easy, helping to overcome the paralyzing effects of complex choices. The alternative to a hard choice can often be making no choice at all.
· Tip 4: Use the power of social influence. When we face uncertainty, we often rely on what others do as a guide for our own action. Greenstone uses consumer reviews to help guide users to the most appropriate product. Advisers can use relevant testimonials and case studies.
· Tip 5: Create small benefits. Offsetting the stream of premium payments, which can weigh heavily on us, Greenstone provides small immediate “benefits” to customers it deems to be most at risk of wavering by offering loyalty incentive rewards such as vouchers and rebates. Scalable technology solutions mean that advisers and insurers may be able to deliver similar types of incentives to customers at almost no cost to their business.
In behavioural finance, as in most areas of business and life, small things can often make a big difference.
