How Behavioural Economics Can Improve Insurance
Since the very start of DIA we always had an open eye for behavioural science, and how these principles are applied in insurance. Think of companies that joined us on stage such as Lemonade, dacadoo and Discovery’s Vitality. We believe behavioural sciences are the key to improve customer engagement, to promote a healthy lifestyle or safer driving, and combined with AI they form the foundation for future business models. We’ve asked Jeff Kreisler to share his view on ‘behavioural economics and insurance’.
Can you tell a bit more about behavioral economics and how this relates to financial services and insurance?
Jeff: “Behavioral Economics is the study of why people make the often irrational decisions that they do, how emotion and our humanity secretly guide of value judgments and the hidden forces that impact our choices. It’s immensely important within the context of finance and insurance. Data science is a very broadly-accepted discipline within the field, but having access to lots of data is simply not enough to influence consumer behavior. Take FitBit as an example – it acquired tons of information about daily activity at its disposal, but it did not motivate people to exercise more, because it did not incorporate the human element. When we combine the tech insight with the human insight – when we add people science to the data science – the potential is massive.”
We believe behavioral economics offers new innovative ways to engage with insurance customers. Why do you think insurers should embrace behavioral economics?
Jeff: “In insurance in particular, people have a very strong emotional reaction to risk and finances. Even if they think they are making an entirely rational decision, there are always emotions involved. Therefore insurers should be aware of those feelings in order to assist people in making better decisions. We cannot change human nature – that’s impossible – but we can change the environment which nudges human behavior and influences decisions. We should create products and services based on a deeper understanding of human behavior. That way we can see from our customers perspective instead of fighting so hard to get them to see ours. Then, when we connect to their emotions, fears, goals, concerns and reality, we become trusted partners instead of mere salespeople.”
Insurance is usually a ‘low involvement’ category. What do you think about how consumers perceive insurance?
Jeff: “Most people mentally categorize insurance as a burden to be avoided if possible. Sorry! It’s not just that it’s hard to think about money and risk, uncertainty and the future – it is! – but that it also triggers a pessimism and gloom – thinking of death or accident or any of the realities which would require insurance – that runs counter to our overly-optimistic mindset. It’s not something anyone wants to do, so we put it off, approach is with unease and seek to minimize our emotional investment in the decision. Knowing this provides us an opportunity to address those fears and reframe the choices in ways that resonate and ignite consumer engagement.”
Lemonade and Discovery’s Vitality are the few well known use cases of behavioral economics in insurance. What are in your view (other) best practices?
Jeff: “Lemonade really puts their commitment to behavioral science at the forefront of their brand (full disclosure, my co-author, Dan Ariely, is a prominent advisor to Lemonade). Many other organizations, from start-ups to established leaders like SwissRE and Allstate, have also explored ways to incorporate the field into their practices and services. The opportunities to apply behavioral insight to many parts of the practice of insurance – from risk analysis and consumer decision-making to disclosure, honesty and consumer loyalty — are immense.”
Obviously, the application of behavioral economics in insurance relies on data. With all sorts of new data streams from connected devices of all sorts (smart phones, wearables, telematics, IoT etcetera) but also from e.g. banks, what data should insurers focus on to benefit from behavioral economics?
Jeff: “This is the great opportunity, and challenge, for the field. Whether its medication adherence, diet and exercise, financial and employment choices, travel or stress management, we have the chance to know exactly what our customers and colleagues are doing. The question then becomes Why? And what can we do to help them do better? That’s where I believe the understanding, testing and application of behavioral science comes in.”