Many people find life insurance, and the materials produced to provide information about it, very complex and therefore struggle to understand the products and the importance of insurance protection.
This has long reduced sales and increased risk of lapsation for existing policies. Recent research by RGA has shown that applying behavioral science principles and techniques can improve customer comprehension of life insurance documents by up to 60%. Insurers have much to gain from communicating more plainly with current and prospective customers to reduce unnecessary barriers when purchasing or renewing their policies.
Do Consumers Understand Your Insurance Documents?
Consumers have access to more information than ever to help inform their life insurance needs. Individuals can research life insurance policies by gathering information from various sources, including insurance agents and brokers, financial advisors, consumer advocacy groups, and the internet. In addition, a myriad of tools are available online, such as calculators and feature comparison grids, to help consumers determine optimal coverage amounts and to quickly compare quotes from different companies. Consumers can also extend their understanding of policy options by reading blogs, watching explanatory videos, and more.
As consumers currently have access to a wealth of information, they should be well-positioned to select the best choice among all possible alternatives. Unfortunately, this is often not the case in practice. Research conducted by the Organization for Economic Co-operation and Development (OECD) finds that in many countries sizable portions of their adult populations struggle with basic literacy and/or numeracy. In the U.K. alone, low literacy/numeracy skills are known to exist in more than 25% of adults, translating to struggles with everyday tasks such as to grasping instructions on a bottle of aspirin or estimating how much fuel is left in a gas tank by inspecting the gas gauge. To protect citizens, the U.K.’s Financial Conduct Authority (FCA) released "The Consumer Duty," an overarching consumer-focused principle that, according to the FCA website, requires financial firms to, at the very least, provide consumers with communications they can understand in order to facilitate positive outcomes.
Whether or not other countries take up regulatory changes similar to those enacted in the U.K., there is a clear and present need for life insurers to focus on crafting policy documents with language that is clear and easily grasped by large portions of the population.
Here, behavioral science may offer some key insights into how to mitigate challenges in customer comprehension.
Cognitive Overload and the Comprehension Challenge
Low literacy and numeracy rates compound an individual’s pre-existing limitations when processing information. First, the human ability to process information cognitively is not vast: people consciously process between two and 60 of the approximately one million bits of information per second the body sends to the brain. Second, humans have certain biological limitations, such as mental exhaustion and the need for sleep, that may preclude endless searches of the information space.
The result more often than not is that decisions are made with bounded rationality. This means that, given cognitive and time constraints, people will ultimately select a “good enough” choice among the alternatives available.
How good are humans at choosing “good enough”?
Decades of research shows that people going about a task can become overloaded if given too much information or information that is too complex (or both). They will typically, in such cases, find ways to lessen the task's difficulty by using mental shortcuts. In shopping, for example, a common and well-utilized shortcut is price. In shopping for insurance, however, seeking the cheapest premium may result in acquiring insufficient coverage. Even individuals classified as “financially literate” by globally vetted measures (i.e., possessing the skills to manage personal finances, budgets, and investments) will underperform in their ability to understand personal insurance. Seen from this lens, the industry’s wide and growing protection gap is not surprising, given the challenges consumers experience when attempting to accurately assess life insurance’s value for their families.
Dampen Comprehension Challenges with Plain Language
Communication clarity is key to minimizing consumers' cognitive burden when purchasing or renewing life coverage. That being said: what does communication clarity actually look like, and how can insurers be sure it has been achieved? The fundamental goal is (or at least should be) to create appropriate communications for the intended audience by focusing on the most effective ways to present the information in terms of both design and semantics. In this way, insurers can provide consumers with the best chance of quickly finding the information they need, comprehending it, and then using it.
Behavioral science research and techniques can be indispensable tools for crafting materials and messages that maximize the potential for life insurance information to be usable and easily understood. However, the ultimate metric of success is putting materials crafted with these tools to the test with intended audiences.
The case study below illustrates what this process can look like in practice.