One would think that because life insurance can help families mitigate risks to their standard of living, consumers would purchase sufficient protection. But the reality is that people in many countries don't have life insurance or are under insured, even though they may be well aware of the value that insurance products offer. In the US, nearly a third of all households have no life insurance at all, despite it being very affordable. Swiss Re's US mortality protection gap study estimated that American households are insufficiently covered in the event of death of a breadwinner in the family by USD 20 trillion; globally the gap stands at USD 86 trillion and is growing.
Why do consumers not buy life insurance? There is no one reason for this. Evidence from consumer surveys highlight some common themes, including price and value for money, perceived lack of need, product complexity, a lack of trust in the industry, and the often lengthy and convoluted buying process. But it doesn't end here. Consumers’ real world choices often reveal behavior that deviates from the predictions of 'rational' decision making. Such findings have given rise to the field of behavioral economics, which explores the limits to rationality and the important roles that emotions and cognitive biases play in human decision making.
Cognitive biases refer to the different behavioral tendencies that influence consumer choices. Many of these biases can lead consumers to view their situation as more benign than it is and to procrastinate over the decision to buy life insurance. Examples include 'status quo bias', or the tendency to postpone making tough decisions because they involve unpleasant discussions or thoughts, 'overconfidence', and 'information overload', or the failure to act when presented with too many or complex choices. At the same time, people take short cuts and rely on heuristics (essentially, rules of thumb) to make decisions. And they copy their peers (herding behavior). The implication here is that well-established social norms can steer behaviors. In the case of the purchase of life insurance, consumers will be more likely to consider buying it if their friends, family, and coworkers own life insurance and share positive experiences.
Consumer surveys and behavioral economics give many pointers how to help consumers overcome existing biases by framing choices in a positive manner, reducing information overload,and improving the buying experience. To take advantage of these findings, insurers must change how they sell products and reverse the long-standing belief that life insurance is 'sold, not bought.' In today's digital world, the fast and easy flow of information allows consumers to make proactive buying decisions. The modern consumer does not want to be 'sold to.' At the same time, the ongoing development of mobile and internet technology makes it possible for insurers to simplify underwriting and reach and respond to the needs of the consumers on many new platforms. Insurers who make the effort to better understand the needs of consumers and how to make life insurance more accessible will be well-positioned to design products that people want. This, in turn, will help consumers make better choices for themselves, improving societal welfare overall.
Category: Funding longer lives: Social contract