What the insurance industry can learn from Behavioural Economics

When we survey consumers, why does a large group of people who know they have a need for insurance – and tell you they would pay the prices currently offered – never get round to buying it? Why is it that at retirement, people with defined benefits pensions almost always go for the full lump-sum allowance rather than the annuity – when the annuity is ‘better value’ in the long run? Behavioural economics offers some answers …

Alison McLean and Will Trump discuss the merits of Behavioural Economics

Over the last 12 months, a small team at Swiss Re has been exploring the world of Behavioural Economics. From choice overload to status-quo bias, via halo effect and loss aversion, what's become clear to us is that these insights have had proven success in policy-making, health behaviour and of course retail.

What's less clear is how these apply to the life insurance market. Would emphasising 'normative behaviour' lead to a higher take-up? Can we drive a change in behaviour simply by changing the way we frame certain questions? Could we tap into mental accounting to influence purchasing behaviour?

The answer is that we simply don't know until we test out in a live environment. And this is a real challenge for our industry, because one of the core insights of behavioural science is that you cannot find out about a customer's (real) drivers simply by asking them and yet we so often fall into the trap of relying on focus groups, consumer surveys etc. before launching a product/idea.

Our work in this field consists of two main parts. First, we have partnered with a leading academic in this field, who is running a number of research projects for us. And second, we are testing out behavioural biases in the real world. This means testing message A vs. message B in a direct mail campaign or tweaking the application form to see if this drives higher disclosure rates or testing two different scripts on a telephone call. Through this we learn what elements of behavioural design really make a difference for the customer.

If you'd be keen to explore how Behavioural Economics could be applied to your area of work please get in touch with Alison McLean (+442079333531) or William Trump (+442079333709).