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?