Is Lack of Trust a First Order Function in Narrowing the Insurance Protection Gap?

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The Geneva Association released an ambitious discussion of trust and its effect on insurance transactions, particularly in the perspective of well-known ‘protection gaps’ that are pervasive across many lines of insurance within mature economies.  Is, as Jad Ariss, Association Managing Director notes in the publication’s foreword, a “lack of trust fundamentally impeding insurance demand,” or are there systemic barriers to insurance demand that trust simply exacerbates?

Patrick Kelahan is a CX, engineering & insurance professional, working with Insurers, Attorneys & Owners. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

In reading the Geneva Association’s recent publication, “The Role of Trust in Narrowing Protection Gaps”, one finds a comprehensive discussion of trust within the context of insurance, including input from a cadre of industry experts.  Clearly the focus is on P&C lines more than health or life, and commercial/reinsurance covers are seemingly purposefully excluded from the piece.  The primary defining paragraph:

“In insurance contracts, trust is embedded in a dual and reciprocal way. On the one hand, the insured, when entering into the contract and paying the insurance premium upfront, has to trust that the insurance company will pay promptly if and when the insured event occurs. On the other hand, the insurance company should be able to trust that the insured, once the premium has been paid, does not act in a way that unduly increases the probability of loss occurrence by adopting a riskier behaviour, known as moral hazard.”

It’s an apt description of the trust expected through a risk sharing contract.  However- does this establishment of trust add to (or detract) from presence of coverage or sales of policies?  Insurance contracts are typically contracts of adhesion, where the carrier holds superior knowledge of the contract provisions and delivery of same, and the customer generally accepts the policy as written.  There’s a ‘quick trust’ that the purpose is resolved- insurance being in place.

Protection Gap or Communication Gap?

Insurance is a bilateral contractual relationship but seldom is comprised of simply a carrier/insured service relationship.  The primary trust concern for an insured when service is required remains focused on expectations and meeting of same;  a claim is suffered, filed for, damage assessed, valued and reimbursed.  That’s what insureds ultimately trust- will my issue be resolved in a manner I expect?  Protection gaps that can be anticipated may not include concerns the insured encounters when coverage is not afforded due to policy provisions that preclude coverage, e.g., excluded causes of loss.  Again, a knowledge gap associated with what might be an unresolvable protection gap.  An expectation of cosmetic surgery reimbursement is not as much a protection gap as it is an expectation gap, same could be said for an insured expecting reimbursement for worn tires.  An insured would not suffer a loss of trust for these instances since protection is not expected.

Figure 5 of the publication denotes sources of distrust in insurance contracts:

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Distrust Factors

As the reader considers the graphic shown above (copied from the publication) a review of the factors might focus the trust concerns.  Lack of competition among insurers, be it typically available breadth of coverage (often from a regulated policy form) or price uniformity may not be an invitation to ‘act opportunistically’.  Truly a fear of competition in a low-margin business suggests carriers pricing policies as tightly as underwriting and analysis data allow.  In most jurisdictions underwriting information is essentially a commodity and with price as the marketing lead for carriers competition is fierce. There is a modicum of truth in the presence of inelasticity of supply as data analysis improves, and carriers become more selective in risks they accept.

Adding in concerns for insurers not wanting lengthy claim services presses carriers to work to de- emphasize these distrust factors; in fact, the opposite may be present in the carriers’ pursuit of retention and loyal customers.  The ubiquity of Net Promoter Score (NPS) use as a measure of customer loyalty suggests competition in a zero-sum game industry supports a reverse approach.

Can we look to risk aversion as a corollary to distrust?  Insurance buyers do not focus on what ifs as in many instances insurance would not be purchased at all if not mandated by law or required by an associated lienholder.  Mandated cover somewhat removes trust from the purchase equation- I need it, you can write it, done and done.  The buying customer buys the requirement with little concern about contractual benefits.  Quick trust goes as far as the purchase, an efficient agent, website or aggregator completing the task.  Do customers consciously trust the promise from the carrier that indemnity will occur when a claim is filed?  One can say certainly for auto/motor cover as customers understand that insurance line better than others, as for homeowners cover the majority of customers lack the requisite knowledge of the HO policy to do anything other than expect cover.  It’s not a protection gap as much as it’s a knowledge gap.

Trust Affecting Insurance Demand

The Association touches well on a key function of customer behavior- excessive discounting, or “an irrationally high preference for money today over money tomorrow.”  Potential purchasers of insurance may consider not paying premiums as a substitute for perhaps obtaining a payout in the future from an insurance policy- it’s a form of denial, certainly, but clearly also a “bias that affects the perception of the value of insurance.”  One might contend this is less a trust issue than it is a game theory choice where the consumer sees a very low probability of incurring a claim and premium dollars are better spent on anything else, now, an approach that can simply be noted as personal risk retention.  Even the most trustworthy carrier or agent may not convince someone to buy cover if there’s an imbalance in knowledge of a future need, and no presence of a mandate to force one’s purchase.

Considering other demand anomalies, the article cites complexity aversion (avoidance of options that are complicated to evaluate) as a rational for lack of trust, that being insurance is simply too complex.  Carriers can mitigate the effect of complexity through introduction of new approaches to insurance benefits, e.g., parametric products.  No issues with coverage determination for parametric cover, the parties agree that if trigger X occurs, payment Y is made.  There are not many parametric options available in many lines but in time that may change (see, “Want Property Insurance to Really Change? The Full Indemnity Model Has to Go” )  Yes, a premium still applies but the downstream effect is clear for the insured, and the factors behind the need are clear in the insured’s mind.  Self-trust.

In further considering trust and demand, the better an insurer can provide information and insurance purpose, and then performs well in providing cover and service, the more trust is built, and a more favorable environment of price elasticity of demand will exist.  Distrust surely has the opposite effect, if the customer buys at all.

Trust Affecting Supply?

Fraud.  There it is- the article cites Insurance Information Institute projections that fraud costs the US P&C industry 10% of the total incurred loss and loss adjustment expense annually, an estimate $US 30 Bn.  As a qualifier, the methodology is based on a twenty five year old study, and as a comparative, premium leakage for US auto PIF alone is an equal $US 29 Billion. Combine that with significant AI improvements in detecting fraud and one could say that in time carriers’ trust in the insured population should improve as detection efforts serve to make customers more ‘honest’ by default.

Continuing, can too much attention be paid to moral hazard in purchases and policy performance on the part of insureds?  This effect can be estimated to extent, but proof of a moral hazard component or fear of lack of attention to the condition of insured property is found only in claim behavior, and policies have defenses against egregious behavior in the form of coverage exclusions.  And, in the world of increasing use of IoT devices and telematics (see IoT Observatory), moral hazard can be better prevented/detected, and may have an ultimate result in changes in policy language.  Symmetry of information builds trust, but absent other carrier supply mechanisms may not build demand.

The real protection gap

The missing discussion in insurance supply is natural disaster perils’ effect on the protection gap, and the according spike in customers’ distrust of the insurance industry when events occur.  Few carriers afford coverage for flooding, earthquake, or wave action in standard policies yet these perils are becoming more prevalent in frequency.  However, in most jurisdictions these perils can have coverage through separate policies or endorsements.  Is the discussion of coverage for these protection gaps commonplace?  No.  The admin and sales of these add-ons is not a smooth process, and the carriers and agents do not enjoy a significant financial benefit from sales of the covers.  Explain that to a coastal resident when storm surge and wind damage are concurrent, and a claim is denied for surge as the proximate cause.  Or, the confusion of what constitutes a property’s presence in a flood-prone area reinforcing a customer’s decision to not acquire flood cover.  Another tough explanation.  Poster child means to address a protection gap and enhance trust, sent by the wayside because of perceived complexity by carriers, misinformation and a lack of financial benefit to the potential seller.

Carriers and agents have more and more tools available to them as technology improves- call it trust-enhancing tech.  The downside- carriers will need to invest in these tech improvements and educate customers.  Not trust, but economics.

This discussion could carry on for more pages than the reader wants to consider.  The Geneva Association enumerated a pretty good accounting of trust mechanisms found within the insurance industry in the publication, but it’s not certain that trust is the primary challenge carriers and customers face regarding protection gaps.  Customers purchase insurance more often because they have to, rather than due to an independent assessment of their risk (insurance is sold, not bought, so it’s said).  Expectations of downstream outcomes become important only upon encountering the need for policy service.

At that point trust becomes the preeminent concern, and retention/loyalty the primary effect on demand.  The author wishes more could be said here, but absent that, please do take time to read the publication.  My thanks to the Geneva Association for providing much to consider and discuss.

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