Ethical behavioural science: what can insurers learn from snow shovel sellers?

Imagine this scenario: a hardware store has been selling snow shovels for USD 15 each. The morning after a large snowstorm, the store raises the price to USD 20. How would you rate the fairness of this action?

Nobel prize winners Daniel Kahneman and Richard Thaler investigated this and other scenarios to understand how raising prices could be perceived as unethical, despite sellers simply reacting to an increase in demand. What they found was a discrepancy between what vendors and customers judged as being an ethical practice.1

Today, more than 30 years later, the question remains as relevant as ever, as seen by the spike in prices of masks and hand sanitizers during the COVID-19 global pandemic.2

Why should insurers care?

From default options in insurance contracts to text messages reminding customers to renew their policies, nudges are becoming more prominent in the insurance industry. Because of their persuasive nature, it is important to consider the ethics of nudging.

Recently, regulators across the globe started tackling this issue through regulations, including the New Consumer Agenda in the EU. Our 2021 SONAR publication examined the regulatory trend on the use of sludges and dark patterns – processes and communications designed to be harmful to consumers.

Moreover, through its partnership with the University of Toronto's Behavioural Economics in Action at Rotman (BEAR), Swiss Re wants to foster an open discussion in the insurance industry to help advance everyone's practices. For this reason, Swiss Re recently organized an event with BEAR and industry speakers Torben Emmerling (Affective Advisory), Christian Steininger (Allianz), Rich Lewis (Decision Technology), Alison McLean (AIA), Michael Browne (Swiss Re) and William Trump (iptiQ) to discuss how insurers can apply behavioural science principles ethically. Here are the main lessons from the event.

1. Customer communications should be designed for… customers! Test whether they are understandable, easy to read and transparent

Practitioners should approach the business challenges and opportunities around ethics, like any other business topic – through empirical evidence. But to test something, we must first define it, which can be very challenging when talking about ethics. Different people have varying ethical views, judging the exact same problem in opposite ways.

Context also affects ethics: think of a homeless person stealing food to avoid starving. So, where do we start? Anyone working on touchpoints with policyholders would already be following the relevant regulator's guidance on this. In addition, we suggest strategies such as collecting further evidence on whether a communication (especially the terms and conditions of an insurance policy) has the right average reading age of the target audience, or whether a representative sample of policyholders perceive it as being non-misleading on average.

2. Make processes easier for consumers – unless it's in their interest to be slowed down

As prominent behavioural scientist Cass Sunstein says, choices will always be presented to customers in one way or another.3 Given this, it is up to insurers to ensure these choices are presented in a way that are in the customer’s best interest. The question then becomes how should these choices be presented?

Professor Dilip Soman from BEAR provides a useful framework to tackle this problem. It analyses nudges over two dimensions: how much they help the consumer and how much they facilitate decision making. While insurance practitioners should always aim to help their customers, sometimes impeding decision making can also be useful. For example, a cooling off period can help the consumer avoid making emotional and impulsive decisions that may be later be regretted. Inversely, facilitating decision making can be unethical, if it is done to lure people into buying policies that are not relevant to them.

3. Becoming ethical can be a win-win scenario for both insurers and customers

Profits and ethics are often perceived as negatively correlated.4 Nudges that trick people into signing up for a membership combined with sludges that prevent those same clients from cancelling can generate profits in the short term. Avoiding these interventions is ethically correct, but can it also be financially beneficial?

The evidence on this is hard to interpret. Some research shows that disclosing conflict of interest can have negative effects on profitability.5 However, most prominently, Ethisphere, a global leader in the field, illustrates that an "ethics premium" can exist. For instance, the most ethical public companies outperformed their peers by over 7 percentage points over the past 5 years.6

In other industries, such as retail, we are seeing important trends towards ethical practices. Research by Dechtech, a behavioural science consultancy, found that the ethics premium varies a lot by sector, but could be worth as much as £82bn a year in the UK7. An example is Apple giving their customers more control over their data and adding the Screen Time function to limit usage of the device. This may cost them money in the short run, but they are likely to gain it back in the long term through trust and reputational gains. In the insurance market, brand and reputation are key to retaining long term customers.

4. How can insurers implement and keep up these best practices?

The current discussion is a great start but there are also some practical implementations insurers can employ.

The best way to find out what is ethical is through behavioural experiments and empirical evidence. Having ethical checklists is also very helpful, if they include concrete and visible actions that are as objective as possible, accounting for different contexts.

Finally, conducting reviews of ethical guidelines and looking for sludges within your company is paramount. Having an external auditor has the benefit of making it easier to spot problems and overcome our own bias, while an internal review makes it easier to implement the changes.

Join the discussion

We want to thank all the speakers and the audience who joined and contributed to the event "To Be or not to BE?". Swiss Re is determined to lead the discussion of ethics and nudging in the insurance market. If you are interested in a behavioural ethics training programme or wish to engage in the discussion around the topic please visit our behavioural economics homepage or contact us.

A special thanks to Isobel Thomson-Cook, Maura Feddersen, Andreas Obrist for their contributions.


1Kahneman, Daniel, Jack L. Knetsch, and Richard Thaler. "Fairness as a constraint on profit seeking: Entitlements in the market." The American economic review (1986): 728-741.
2Department of Consumer and Worker Protection:
3C. R. Sunstein, “The Ethics of Nudging”, Yale Journal on Regulation, Vol. 32, 2019,
4Bowie, Norman E., (2000), Companies Are Discovering the Value of Ethics, Business Ethics 00/01, 12th ed., pages 150-152.
5Sah, Sunita, George Loewenstein, and Daylian M. Cain. "The burden of disclosure: increased compliance with distrusted advice." Journal of personality and social psychology 104.2 (2013): 289.
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