How far can behavioral economics nudge up digital innovators?

Nobel Prize winning economist Daniel Kahneman, in the 1970s, studied biases in economic decision-making and how people handle risk, challenging the belief that humans behave rationally when making financial choices. The ensuing body of work that it spawned – “Behavioral Economics” – has become entrenched in business parlance, as rigorous research has demonstrated that understanding and anticipating biases can guide interventions to influence consumer behavior.  As regards finances, health or diet, people need just a little nudge to get them moving in the required direction.

Using principles of behavioral science, banks are creating experiences to sway account holders thereby strengthening community finances, loyalty and well-being. Merrill Lynch set out to apply these principles to persuade young people to buy retirement products, which aren’t as much a priority as education debt or saving up for their first home is for this demographic group. The bank had users upload their photo and processed it through an ageing algorithm so they could see themselves 10, 20, 30, 40 years hence. Seemingly odd for an investment bank to include in their digital product, it got users to realize they needed to prepare for the future and precipitated the desired behavior change.

From such nuanced understanding of human behavior, businesses employ techniques like anchoring (showing benefits or downsides upfront) and choice architecture (presenting choices differently to consumers) to exert stronger influence on how consumers choose to act. Nudging, a behavioral science approach uses “subtle interventions” to encourage people to make better decisions while respecting the freedom of choice.

Behavioral Interventions: Adapted from Center For Financial Inclusion Report

Over the past decade, nudging has pervaded government and private institutions, with the likes of Morningstar, Walmart, the UK and US governments, successfully applying nudging techniques. Several insurers have embarked on honing this tactic. In insurance, the benefits of nudging range from increased sales, reduced fraud to improved customer and employee satisfaction. Many insurers use nudging selectively, experimenting to optimize digital solutions. Some have deployed use cases anchored on behavioral science, in their organizational strategies.

The Vitality program at South African insurance company Discovery originated from the premise of such interventions. Leveraging personalized interaction, they incentivize customers to manage their well-being. Healthier behavior is promoted while achieving deeper, long-lasting relationships. Based on this economic science, customers are offered support to achieve their personal goals by: knowing their health, improving their health and enjoying rewards. Insurtech Lemonade asks users to sign a digital pledge of honesty at the beginning of the signup process rather than at the end, and captures it using a camera, thus reducing the likelihood of fraudulent claims. MetroMile uses an in-vehicle device to judge how safely its users drive and rewards them accordingly with higher or lower premiums.

Swiss Re’s Behavioral Research Unit, based on more than 500 client engagements, has identified five main areas for behavioral economics to create value along the insurance value chain:

The results from their trials were encouraging: 20% uplift in sales, 3% increase in underwriting disclosure; up to 10% reduction in claim padding and 3% reduction in cancellations.

It is now opportune for insurers to weave behavioral science into digital innovations to solve deep-entrenched problems of underinsurance, inaccurate disclosures and unhealthy lifestyles. Behavioral interventions have been helping carriers align strategies with true needs of customers. Using insights derived, the right interventions produce changes to real-world behavior that closely match benchmark scenarios. Combined with intelligent technology, insurance risk assessment is transforming to one that actively tries to reduce risk. Motivated consumers gain from lowered premiums and diminished risks, while insurers benefit from behaviors that result in fewer payouts. Though not fully there yet, the industry is inching closer to realize its vision of technology-driven automation and behavioral science driven improved decision making.

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