Improving the way we do insurance through behavioural science

The insurance industry is finally catching on to the fact that its customers are humans and not robots and behavioural science is better enabling insurers to know and respond to their customers.

Dr Lizzy Lubczanski, Behavioural Research Manager at Swiss Re discussed the use of this technique, and explained how it is becoming more prevalent within industry practices and as a result, some companies are more in touch with their customers.

“Behavioural economics provides the techniques needed for understanding the automatic (and often irrational) drivers of consumers' behaviour,” she started.

“Finally we're getting answers to the question - why aren't consumers buying the products they said they wanted in traditional consumer research surveys? As it turns out - context is everything, so live field trials with real insurance customers are the way to reveal how things other than price and information are influencing behaviour,” said Lubczanski.

According to Lubczanski, the traditional approach assumes that people are rational, have set preferences and seek to maximise utility – ie, do whatever is in their best interest. Whereas a behavioural science approach, understands that people are not always rational and are in fact hugely affected by seemingly irrelevant “contextual” factors.

Finally we're getting answers to the question - why aren't consumers buying the products they said they wanted in traditional consumer research surveys?

“To change behaviour, we therefore need to change the context in which people make decisions, kind of like giving them a nudge,” she said.

Using an example of nondisclosure by a client, Lubczanski case studied trends they noticed around how an individual would disclose information about their smoking habits.

“What we noticed is that if you give the client a simple binary option of being either a smoker or non-smoker, it would be difficult to get an answer as that doesn’t really account for those who might smoke occasionally, or just socially,” she said.

“By introducing more options, like do you smoke ‘daily, weekly, monthly, yearly, I quite over a year ago’ and so on, we say 19% improvement in smoker disclosure".

Based on research carried out by Swiss Re’s Behavioural research Unit, which was launched in 2013, 550+ client engagements showed there are five main areas for behavioural economics to create value along the insurance value chain:

• Sales - specifically looking at how to increase interest and take-up-rate;
• Underwriting - how to encourage more accurate disclosures;
• Claims - how to increase accuracy and speed in the process;
• Retention - how to improve lapse/renewal behaviour; and
• Admin – how to improve operations.

“Seventy percent of trials have improved customer behaviour,” said Lubczanski. Swiss Re has documented a 20% uplift in sales, 3% increase in underwriting disclosure; up 10% reduction in claim padding and 3% “absolute reduction” in cancellations.

With customer-centricity a key proponent of successful InsurTech start-ups too, is it time for all insurers to jump on the band-wagon?