Behavioral Economics

CCEA 2018

Dr. Allison Varley LeeBehavioral Research Consultant

Swiss Re

Behavioral Research Unit

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Swiss Re’s Behavioural Research Unit (BRU)

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What is behavioral economics?

Traditional Approach

Behavioural Science Approach

Assumes that people:

• Are rational & have set preferences

Understands that people:

• Are not solely driven by facts

To change behavior…

Provide information and financial incentives

To change behavior…

Change the context in which people make decisions (“nudge”)

Test everything in the real world and measure if it has an impact

Behavioral Research Unit

Applying BE to Insurance

Test changes to direct customer touch points, such as:

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CLAIMS/FRAUDUNDERWRITING RETENTIONSALES

letters, emails, forms, websites, text messages, and agent trainings/call scripts.

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Randomized Controlled TrialsAn effective method to evaluate the behavioral intervention

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Adapted from: Cabinet Office Behavioural Insights Team, “Test, Learn, Adapt: Developing Public Policy with Randomised Controlled Trials, 2012

Representative sample is randomly

assigned into 3 groups.

Behavior measured in all 3 groups to make comparison

across groups.

How to think about a problem like a behavioral economist

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M

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S

P

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MessengerWe are influenced by who relays information.

IncentiveWe respond to incentive using mental shortcuts.

SalienceWe respond to things that are new and relatable.

PrimingBehaviour can be influenced by unconscious cues.

NormsWe tend to do what those around us do.

DefaultsWe like to "go with the flow“.

AffectEmotional associations can shape the way we behave.

CommitmentWe look to be consistent with ourselves and our public promises.

EgoWe act in ways to make us feel better about ourselves.

Behavioural Insights Team, 2009

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Case Studies

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Improve response time for medical evidenceUK Life Insurer

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BE intervention

• Anchoring message to fast response time.

• Hand written post-it note to enhance salience and affect of the message.

Results

• Statistically significant increase in proportion returned within 10 days (TI) and 30 days (CI)

63%<30d

Handwritten post-it note:

Your patient may have as little as 12 months left to live.

Please don’t delay sending this form back. Thanks.

73%<30d

24%<10d

32%<10d

Message at the top of the form:

Did you know our fastest GPs return these forms in as few as

3 days? Could you do the same?

1. Control 2. Added Messages

Problem Statement

Business Challenge

The average response time taken to receive medical information from doctors is 33 days for Critical Illness (CI) and 24 days for Terminal Illness (TI).

How to shorten response time with an additional message?

Critical Illness

Terminal Illness

Increase health information disclosureAustralian insurer (1/2)

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BE intervention

• Salience: changed placement of the honesty declaration

Results

• 31% relative improvement in drug use disclosure

• 3% relative improvement in alcohol consumption reporting

• 7% relative improvement in smoker disclosure

1. Control – Honesty Declaration at the endof the form

2.3% 5.9%

Drug use

Alcohol

15.0%Smoker

8.6%

88.2%

16.0%

11.3%

85.3%

Problem Statement

Business Challenge

The client identified several areas of under-disclosure.

How to improve disclosure in smoking, alcohol consumption, and drug use on a standard underwriting form?

2. New – Honesty Declaration at the beginning of the form

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Increase health information disclosure Australian insurer (2/2)

BE intervention

• Ego: expand binary options of ‘smoker’ vs. ‘non-smoker’ into more options

Results

• 19% relative improvement in smoker disclosure

Problem Statement

Business Challenge

The client identified several areas of under-disclosure.

How to improve disclosure in smoking on an underwriting form?

1. Control 2. Ego

Please select your smoking status. By smoking status, we mean the use of tobacco or e-cigarettes or nicotine replacement products (including nicotine patches)

Daily Weekly Monthly Yearly I quit less than a year ago I quit over a year ago I have never smoked

Have you smoked tobacco, e-cigarettes, or any other substance or used nicotine replacement products (including nicotine patches) within the last 12 months?

Yes No

19%16%

• Global insurer wanted to increase customer satisfaction by encouraging customers to take damaged cars to an in-network repair (provided better quality service and discounts vs. out-of-network)

• Tested 20 ‘nudges’ on 7,500 cases of breakdown assistance

• In this case

– Defaults: framing the in-network benefits as something that would be lost if customer went out-of-network

– Salience: Given greater quality of in-network shops, made ‘quality’ the salient feature

– Empathy/personalization: Assistance specialist started conversation by expressing empathy (“I’m sorry your car broke down—that must be quite inconvenient”)

• Volume of cars received by in-network repair shops increased by up to 9%

• Customers involved expressed 13% higher satisfaction

Encouraging use of preferred repair shops

11McKinsey, 2017

Claim-causing incident

•Encouraging safe/healthy behaviors

•Clearly communicating about coverage

Filing claim

•Honest & accurate disclosure

•Fraud prevention

•Form completeness

Claim evaluation

•Speed & completeness of 3rd party requests

•Speed & efficiency of evaluation

Claims & Fraud timeline

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Communicate decision/offer

•Reduce complaint call rates following rejected claim

Offer acceptance?

•Increase offer acceptance

•Reducing length of claims

Legal involvement

•Increasing settlement acceptance

Post-claim decisions

•Encourage rehabilitation

•Encourage using providers of choice

• Up to 30% of claim revenue is lost to soft fraud (i.e., “smalltime cheating by normally honest people”).

– The most common type of insurance fraud (39%) is claim padding

• Solution: Detection, or Prevention?

• Evidence from academic research. Claim padding reduced when…

– consumers agree with an “honesty statement” at the beginning of a claims process.

– framed as non-normative (e.g., “A small minority of consumers pad their claims”)

– framed as having ‘victims’ (e.g., “When policyholders pad insurance claims, this results in higher costs to all their fellow policyholders.”)

– deductibles are lower—consumers view deductibles as ‘unfair’ and, therefore, see claim padding as more ethically permissible when deductibles are high.

Fraud Prevention: a Behavioural Economics perspective

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Coalition Against Insurance Fraud (CAIF), 2017; Association of British Insurers, 2011; CAIF, 2007; Miyazaki, 2009; Crime and Fraud Prevention Bureau, 2000; Leal, Vrij, Mahari, & Mann, 2016

• Behavioural Economics can help to improve interactions with customers in sales, retention, underwriting and claims environments.

• Small, inexpensive contextual changes (“nudges”) can make disproportionate differences to customer behaviour.

• Only by running rigorous tests can we truly establish what works (and it’s not always what we think).

Key takeaways

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Q & A

16Behavioral Research Unit

Identify measurablepain points

Analyzehistorical data

about customer behavior

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Develop a testing

plan

-Randomized A/B testing

-Before/After

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Analyzeresults

and provide insights

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Client Collaboration Timeline

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Intro to BE

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Launch trial & collect data

3-6+ months

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Mock up communications

Incorporate behavioral economics

concepts

Subject:

Your Motor Policy for <vehicle

number> is due on <expiration date>

Subject:

Renew your Motor Policy today at a privileged rate

Subject:

Motor Policy Renewal

Reminder – Save 10% on your Motor Policy!

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BE intervention

• Ego messaging: “privileged rate” today.

• Salient message using smart personalisation.

Results

• Statistically significant improvement in email open rate, with no adverse impact on the subsequent click rates

1. Control 2. Ego 3. Personalised

33% 42% 81%

Increase retention through emailsMalaysian Motor Insurer

Problem Statement

Business Challenge

Motor insurer wants to encourage renewals

How to improve email open rate by changing the subject line?

Behavioral Research Unit

Renewal reminders via text messageHealth Insurer

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BE intervention

• Social norms

• Ease message

Results

• The social norms SMS outperformed the control message (85% confidence) by 1.5%

• The online payment SMS outperformed the control message (90% confidence) by 2.5%

Problem Statement

Business Challenge

Health insurer is aiming to increase renewal rates for annual health insurance.

How to improve renewal rates with a text message?

SMS highlighted the ease of

process by giving a link to renew policy online

SMS:Did you know that so far this year, 9

out of 10 customers have chosen to renew

with us?

No SMS sent –Renewal Letter was sent as usual

1. Control 2. Social Norms 3. Ease of Process

90.9% 92.2% 93.2%

Behavioral Research Unit

Increase responses from customers who have movedUK Life and Pension Insurer

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BE intervention

• Increased salience of the letter by asking a question in relatable language

Results

• Relative uplift: 15% (sig at 90%)

Roll-out: 2,700 letters achieved 37.1% (making results sig. at 95%)

Surprising finding: significant decrease in proportion responding by phone (from 71% to 61%)

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Week 2 Week 3 Week 6 Week 10

Control Salient Letter

31.4% 36.2%

Problem Statement

Business Challenge

The insurer has lost contact with a segment of customers as they have moved house. They are able to find their new address, but must write to them and receive confirmation from the insured.

How to increase rates of new address confirmation?

1. Control 2. Salient Letter

Behavioral Research Unit

Legal notice

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The information and opinions contained in the presentation are provided as at the date of the presentation and are subject to change without notice. Although the information used was taken from reliable sources, Swiss Re does not accept any responsibility for the accuracy or comprehensiveness of the details given. All liability for the accuracy and completeness thereof or for any damage or loss resulting from the use of the information contained in this presentation is expressly excluded. Under no circumstances shall Swiss Re or its Group companies be liable for any financial or consequential loss relating to this presentation.

Behavioral Research Unit