When it comes to finance, we assume people are rational, so we give people more information and longer documents and explain the actuarial principles in the hope that they will result in their making more rational decisions. However, from an insurance perspective, people do not make decisions that we would regard as rational, so giving them more information does not always help; in fact, in may only confuse them.
This was said by Nick Clifton, the customer experience manager for Swiss Re Europe, who was a guest speaker at Sanlam’s recent Financial Confidence webinar for intermediaries.
Clifton spoke about how advisers can apply behavioural economics to have better conversations with their clients.
Read the first article on Clifton’s presentation: How intermediaries can have better conversations with their clients
The following study was conducted some years ago to illustrate that people do not necessarily make what would be regarded as a rational decision.
A group of people were given two tasks to prepare for a new job: buy a new pen to sign documents and buy a smart suit.
They were told a new pen cost 200 at store 1. If they walked 15 minutes to store 2, they could get exactly the same pen for 100. Most of the people who were asked whether they would go to store 2, said yes. They instinctively wanted to save 100, because they perceived this as a significant (50%) saving.
Then they were told a new suit would cost 3 000 at store 1. If they walked 15 minutes, they could get the same suit for 2 900. Most people did not want to walk 15 minutes to save 100, because the saving was seen as relatively small (3%).
How to overcome objections
Objections are when your client says, “I don’t need it”, or “I can’t afford it”, or “It won’t happen to me”.
Clifton said that when people say these things, they often mean something else:
- “I don’t need it” may mean “I don’t understand it”.
- “I can’t afford it” may mean “I don’t value it”. Affordability is a genuine problem. However, if someone is talking to an intermediary, it is reasonable to assume that affordability may not be the biggest barrier.
- “It won’t happen to me” may mean “I am ignoring it”.
1. Framing
The concept of “framing” is key to overcoming these barriers, and framing is one of the most important ways to move clients from System 1 to System 2 thinking.
Clifton said intermediaries should not assume that the words they use resonate with their clients. You should try to use words that do – words that provide them with a sense of getting initial value. For example, “insurance” can be substituted with “financial protection” and “claim” with “safety net”.
2. Enhance value
Benefit minus cost equals net benefit. When the net value is positive, people generally buy.
Insurance offers a benefit that will be paid at some point in the future – hopefully, with a low probability, because clients are only paid when something bad has happened to them. However, this future benefit comes at an immediate cost. This is different to most purchases, where consumers receive an immediate benefit for an immediate cost. This is why creating net value in the context of insurance is a challenge, Clifton said.
The other challenge is that insurance net value is generally eroded over time. Research shows there is usually a take-up of insurance produces immediately after a major event, such as a flood, but this reduces over time.
To improve the value equation, Clifton said intermediaries should bring into the conversation the things that the client will get now (and therefore lose if they do not take out the policy) and that will last throughout the lifetime of the policy (not just at claims stage).
Examples are peace of mind (the client’s assets for retirement are protected if they take out an income protection policy) and a service, such as mental health support and diabetes programmes. These will enable clients to recognise a jump in the value equation when they purchase, and it will make it more likely that they will maintain the policy.
3. Address optimum bias (it won’t happen to me)
There are different schools of thought of how much advisers should use statistics in a sales talk. You might assume that rolling out stats on the chances of getting cancer will cause someone to take out critical illness cover. However, typically, when someone is told they have a 50% chance of getting cancer at some point in their lives, they simply place themselves in the category of the 50% who won’t, Clifton said.
At the same time, it is challenging to have conversations about ill health and death.
The work-around for both challenges is to change the perspective of the conversation.
Clifton said one thing works that works well is to ask a simple question: “If the worst were to happen, what is your Plan B?” This moves the client from thinking about the condition and their likelihood of getting it (or not getting it) to thinking about the risk and the downsides if something did happen. How are they and their loved ones going to cope?
Positioning the underwriting process for more likely completion
Before underwriting happens
Make it clear to the client that underwriting (and the potential of being rated) is a normal part of the process and will be the same no matter where the client goes, Clifton said.
When facing a potentially long and difficult process, he said it works to break down the process into manageable chunks in the client’s mind.
For example, instead of saying, “I’m now going to ask you 15 questions”, break it down into, “I’m going to ask you a couple of questions about your doctor, five questions about you generally (such as your height and weight) and eight questions about specific health conditions”. This becomes mentally more manageable for a client and removes fear of the unknown.
Appeal to the ego – highlight the positive aspects of telling the truth: it is more likely to lead to a valid claim.
What you can do if your client has been risk-rated
Use anchoring, which is the idea that we tend to make decisions based on something else that has happened previously, normally the first thing about the process or what we have already been told, Clifton said.
For example, anchor the new premium to the larger benefit so that the higher premium seems more reasonable. “If the worst were to happen, your family will still get 100 000 and the payment has only increased from 100 to 150 a month.”
Clifton said you can also use loss aversion.
Explain to the client that they have been through the process and have been rated because of the condition they have. However, we have chosen this provider because it has the best value or is the most appropriate to your needs. If you go somewhere else, you will go through the same process again are likely to achieve a worse outcome, because you will still be rated, but it will not be the best value or the most appropriate.
