Guiding clients towards the right insurance policy can often feel like navigating a labyrinth. Despite the undeniable benefits of adequate coverage, clients frequently exhibit reluctance or make seemingly irrational choices when it comes to purchasing insurance. This hesitation is largely driven by cognitive biases that cloud their decision-making processes. As advisers, understanding these biases is not just a strategic advantage but a pathway to delivering better consumer outcomes, in line with the FCA’s consumer duty regulations, so that advisers can avoid foreseeable harm to the clients. By harnessing insights from behavioural economics, advisers can transform their approach, ultimately guiding clients to more informed and beneficial insurance decisions.
The Influence of Cognitive Biases
Clients’ struggles with insurance decisions can often be traced back to cognitive biases—mental shortcuts that simplify decision-making but can lead to systematic errors. Recognising and addressing these biases can revolutionise how advisers present insurance options and engage with clients, enabling them to make informed decisions. Let’s explore some key biases and potential ways advisers could present insurance to their clients:
Availability Heuristic
This bias occurs when people estimate the likelihood of an event based on how easily examples come to mind. Media coverage of sensational events like house fires or burglaries can skew perception, making rare events seem more common.
Imagine your client reads about a house fire in the local news. Suddenly, they’re overly concerned about fire risk but dismissive of more probable threats like water damage from plumbing issues. The vividness of the house fire story lingers in their mind, inflating the perceived risk of such an event. Yet, statistics might show that water damage from a leaky pipe is far more common and costly. The challenge is to gently guide them towards understanding the real risks they face without diminishing their genuine concerns.
Risk Salience
Clients often overestimate risks that evoke strong emotional reactions, such as natural disasters, while underestimating more mundane but statistically significant risks.
A client may be fixated on getting flood insurance due to recent news coverage of flooding but neglects to consider the more likely risk of theft or accidental damage in their area. Floods are dramatic, visceral events that grab headlines and attention, but everyday risks like theft or a fallen tree on the car rarely make the evening news, despite being far more likely. The task here is to reframe the conversation around these less sensational but more probable risks.
Representativeness Heuristic
When clients judge the probability of events based on how much they resemble what they perceive as typical, they might ignore actual statistical probabilities.
Consider a client who believes they don’t need protection because they “never get sick,” ignoring the unpredictable nature of illness or job loss. They are healthy now, so they assume they will remain so, neglecting the unpredictable and often capricious nature of life. This bias can lead to significant vulnerabilities if an unforeseen event disrupts their ability to pay the mortgage.
Risk Threshold
Many clients ignore risks they perceive as too unlikely, regardless of the potential severity.
A young, healthy client might dismiss life insurance or critical illness cover because they perceive their risk of illness or death as minimal. The youthful illusion of invincibility blinds them to the reality that low-probability events can and do happen, and their financial repercussions can be devastating. It’s about making the intangible tangible, showing how even small probabilities deserve serious consideration when the stakes are high.
Affection Effect
Emotional attachment to an insured object or person increases the perceived value of insurance.
A client may be more willing to insure their home contents because of sentimental value attached to certain items, rather than focusing on more practical but less emotionally engaging coverages like buildings insurance. People place immense value on items imbued with personal meaning—a grandmother’s necklace, a child’s first painting—often overlooking the practical necessity of broader coverage that protects their overall financial well-being.
Loss Aversion
People tend to prefer avoiding losses over acquiring equivalent gains.
A client may be more motivated by the prospect of avoiding financial loss from a potential home accident than by the benefits of a policy discount. Loss aversion is a powerful motivator. The fear of losing what one already has can drive decisions more strongly than the allure of gaining something new. Highlighting the protection insurance offers against significant future losses can be more compelling than any immediate discount.
Time Preference
Clients often favour immediate benefits over future gains, leading to a reluctance to invest in insurance.
A client might prefer to spend money on immediate home improvements rather than on an insurance policy that offers future protection. The immediate gratification of a new kitchen or bathroom remodel can overshadow the less tangible, but ultimately more crucial, benefits of insurance coverage. The key is to illustrate how a small sacrifice today ensures security and peace of mind tomorrow.
Certainty Premium
Clients highly value guarantees of safety over probabilistic outcomes.
A client may prefer a policy that offers guaranteed payouts for specific events over one that has a range of outcomes, even if the latter offers potentially better coverage. The certainty premium is about the comfort found in guarantees. People often choose the security of known outcomes over the ambiguity of probabilistic benefits, even if the latter could offer greater protection.
Myopic Loss Aversion
This bias causes clients to undervalue long-term benefits when evaluating them frequently.
A client reviewing their expenses annually might see their insurance premium as a redundant cost if they haven’t made any claims, leading them to consider cancelling it. Frequent evaluation of insurance costs can lead to undervaluing its long-term benefits, especially when no immediate “reward” (i.e., a claim) has been experienced. It’s a short-sighted view that ignores the true purpose of insurance: long-term security.
Consolation Effect
Insurance provides not just financial reimbursement but also emotional consolation.
After a burglary, a client finds solace in the support and reassurance provided by their home insurance company, beyond just the financial reimbursement. The emotional support and peace of mind offered by knowing someone is there to help in times of crisis add a layer of value to insurance that goes beyond mere financial compensation.
What Can We Learn?
To effectively address these biases from a marketing perspective and support good consumer outcomes, advisers should focus on:
- Understanding the client needs: Asking the right questions to discern what the client genuinely needs versus what they believe they need based on their unique situation and life stage is crucial.
- Simplifying Choices: Present policies in a way that aligns with how clients naturally think and decide. Clear, accurate and concise information helps clients make better choices.
- Emphasising Emotional and Practical Benefits: Focus on the emotional peace of mind and practical security that insurance provides. Stories and testimonials can make these benefits more relatable.
- Building Trust: Ensure transparency and reliability in presenting policy terms and claims processes. Trust is the cornerstone of client relationships.
- Using Social Proof: Showcase testimonials and endorsements to build confidence among potential clients. Seeing others’ experiences can support decision-making.
- Storytelling: Sharing real-life stories of individuals who benefited from having insurance can create an emotional connection and illustrate the practical benefits of coverage.
- Regular Follow-ups: Maintaining regular communication with clients to review their coverage needs and life changes can ensure that their insurance policies remain relevant and adequate.
Understanding and addressing cognitive biases in insurance decision-making is crucial for mortgage and protection advisers. By recognising these biases and presenting products accurately and to the right audience, advisers can guide clients toward more informed, rational insurance choices, ultimately improving client satisfaction and loyalty. This behavioural approach not only enhances the advisory process but also helps clients appreciate the true value of being adequately insured, leading to outstanding consumer outcomes.
Author: Martin (Ken O’Callaghan) Head of Marketing, HLPartnership
