Lloyd Richards contributed to the writing of this blog post.
In the preceding blogs What is BE and Three is the Magic Number, we talked about Behavioural Economics (BE). What it is, why it’s important in insurance and how the FCA are using the science behind it to help them protect consumers against companies making unfair profit out of them. Here we are going to talk about some less obvious ways insurers may already be taking advantage of some of these biases.
In the first blog of this series we used the example of designer clothes selling for many multiples of an own-brand equivalent. Why then do people pay so much more for Superdry than for Topshop?
Clearly insurance is never likely to have the ‘cool’ of Superdry or the brand awareness of Nike. That said the techniques commonly used in marketing-lead industries like fashion are creeping into finance. Look at the impact Santander’s recent celebrity marketing campaign has had on customer numbers – in the nine months to January 2014 232,000 people switch to Santander from other banks, perhaps due to Jessica Ennis-Hill and her co-stars. In the insurance world her role as a Pru Health ambassador makes policyholders feel as though they are in good hands.
This type of advertising is known in the marketing industry as ‘celebrity endorsement’, but is this really just a form of Persuasion? Do customers see an athlete who most likely knows no more about insurance than they do? Or do they see an easily recognisable (likeable) face that they can trust? Indeed do some people go further and gain (over)confidence from seeing a world-class performer – and somehow assume their expertise in sport is transferable to finance?
Biases in play
Insurance companies play on our biases in a number of ways in order to make products seem more attractive than they really are.
As well as celebrity endorsements adverts often aim to trigger an emotional response, for example by showing the regret of loss from somebody who failed to purchase insurance. Inevitably they are shown regretting their stupidity alongside their dour, unsmiling family who clearly detest their loved one’s poor financial planning, before we cut to the happy, smiling, beautiful, insurance-purchasing family.
Other strategies play on our inertia, requiring that policies be cancelled by post (which usually means going to a shop and buying stamps, because who keeps a stock these days?) rather than a simple click of a button. Then there are banks that reduce the interest rate on savings accounts bit-by-bit, knowing some customers won’t move, until they reach 0.1%.
Whilst this may paint a picture of menacing businesses manipulating our emotions and actions for financial gain, there is plenty of evidence that the motives for BE can be altruistic. Aviva, for example, offers £10,000 free life cover to new parents up until their child’s first birthday. Whilst there is some potential for profit driving this it is undeniably a very nice thing to do.
Whether used to bring in business or help people, it’s entirely possible that some practices are innocent of the intent to play on our biases. As discussed in the earlier blogs the FCA is on the case and is conducting deeper research into specific markets. The FCA recognises that in some cases insurance companies may be responding to simple consumer demand (insurance for small risks such as mobile phones) without realising that doing so exploits a bias (high loss aversion). The key for the FCA here is to work with companies to identify how behavioural economics can help guide practices; not to make more profit but to ensure the market functions in the interest of consumers.