A new approach to non-disclosure: Using digital tools
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Non-disclosure has been seen as something largely unavoidable, but relatively marginal by insurers. Research published at the end of 2015 shocked the insurance industry. Around 7% of life policies written are estimated to contain some form of non- or under-disclosure. By the time these numbers mature into claims, non-disclosure accounts for one in six of claims, or around 17%. These are significant numbers and affect the whole risk pool.
What makes so many people lie on a life insurance declaration? In the subjective eyes of individual applicants, the line between truth and deception is not necessarily clear. Individuals make thousands of decisions every day, and those decisions are very context-dependent. It is quite possible for applicants to fool themselves, to fudge health issues and to behave in a way that defies conventional rationality.
How insurers should react
The traditional process of discovering non-disclosure that slip through the underwriting process does not occur until the claims stage. This is a significant loss for the policy holder, counting on a payout – and not always a good outcome for the insurer, as non-payment of a claim has a negative reputational effect and may incur regulatory scrutiny.
One potential answer is to find points of interaction with policy holders between the underwriting and the claims stage. As an example, MMI provides clients the opportunity to participate in a rewards program. In exchange for additional medical information, clients receive a premium discount. To remain eligible for the discount, client need to complete an online health questionnaire at least once every three years.
MMI has partnered with the Swiss Re behavioral research hub to test the impact of changes to the online health questionnaire on disclosure rates. The first experiment asked for a commitment of honesty upfront instead of after the fact, which increased the salience of disclosed information.
Although the number of observations were not sufficient to prove statistical significance for all conditions, notable increase were reported for obesity, alcohol consumption, medical conditions and health concerns.
There are other techniques insurers can use to increase disclosure. One of those is to provide reference points. Research has shown that when confronted with a range of options, respondents tend provide better quality information compared to an open question. In addition, care should be taken when grouping responses – client tend to choose the middle option, even if they were, for example, relatively heavy smokers. It may also make a difference to run such questionnaires together with medical professionals, on the assumption that policy holders are more honest with doctors than insurance agents.
About the speaker
Ruhan Coetzer is Head of Research and Analytics at MMI Life Insurance. He spoke at the "Next Generation Insurance Customer: Bringing it to Life" which took place on 22-23 June 2016 at the Swiss Re Centre for Global Dialogue.Summary by Simon Woodward