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: [email protected]
Twitter: @LaughlinPaul
LinkedIn: https://www.linkedin.com/in/paullaughlin
Any questions?