Behavioural economics presentation for Chartered Insurance Institute

Behavioural Economics: What is it and what does it mean for the Insurance profession?

Paul Laughlin (former Head of Customer Insights, Lloyds Banking Group Insurance & Scottish Widows)

How we really make decisions

Would you rather…

A B

Take a 50% chance of gaining £1,000 and a 50% chance of gaining nothing?

OR

Gain £500 for certain?

How we really make decisions

Would you rather…

A B

Take a 50% chance of losing £1,000 and a 50% chance of losing nothing?

OR

Lose £500 for certain?

Behavioural Economics (BE)

Two modes of thought: Intuition (fast, automatic, effortless, associative, difficult to control/modify)

Reasoning (slow, controlled, demanding, serial, rule governed, flexible)

10 BE biases highlighted by FCA

Present Bias

Reference Dependence and Loss Aversion

Emotional Drivers

Overconfidence

Overextrapolation

Projection Bias

Framing, Salience and Limited Attention

Mental Accounting and Narrow Framing

Decision Making Rules of Thumb

Persuasion and Social Influence

Relevance to the Insurance industry Insurance customers particularly likely to suffer from BE biases when making insurance decisions because:

•  Most consumers find insurance products complex & boring; •  Many insurance product decisions require assessing risk and

uncertainty; •  Insurance decisions often require trade-offs between the present

and the future; •  Many insurance decisions are emotional (inc. role of fear); •  It can be difficult for consumers to learn about insurance products,

due to infrequent interactions and long delay before or no experience or the risk being mitigated.

Potential for Good or Evil

“Firms play a crucial role in shaping consumer choices through product design, marketing and the sales process. Much consumer detriment arises as firms design and sell products that benefit from consumers not overcoming mistakes or, at times, exacerbating mistakes”. FCA Occasional Paper 1

Examples of the Dark Side

FCA have stated they will use these as early warnings: 1.  Rip-offs: Uncompetitively high margins; 2.  Suckers: Concentrated profits in small customer group; 3.  Bargains: Innovative products that appear very cheap; 4.  Traps: Contract features that often target BE biases; 5.  Regret: Reported or potential regret; 6.  Folly: Choices out of line with common sense; 7.  Confusion: Observed or likely confusion.

Ways to use BE to help customers

Customer Need

Ideal Outcome

Bias 1

Bias 2 Bias 3

Bias 4

Final advice

•  Avoid the hype, BE just helps with creating hypotheses to test (not an exact science).

•  Research is not dead, perception matters, eye tracking & considering biases already best practice.

•  FCA BE team understand this field well and are keen to work with providers to test how to deliver better customer outcomes.

Paul Laughlin Independent Consultant Email: laughlin.consultancy@icloud.com Twitter: @LaughlinPaul LinkedIn: https://www.linkedin.com/in/paullaughlin

Any questions?