In the world of finance, behavioural science — an intersection between economics and psychology, as we know it — can prove incredibly insightful. Behavioural science is applied to explain the influence of social and psychological factors on the financial market. It challenges the traditional economic theory that a human being has the ability to always make rational decisions, instead suggesting that many customers make more random financial decisions based on emotions and psychological biases. For instance, biases such as the confirmation bias, status quo bias, endowment bias, hindsight bias, and regret-aversion bias influence a policyholder’s decision-making behaviour.
Although the application of behavioural science in the insurance sector is relatively new, it has the potential to redesign underwriting, promote customer trust, reward customers for healthy behaviour, and more. Of late, the industry’s outlook is shifting away from goal-based insurance policies to lifestyle-based incentivising. As a Mint report outlines, in September 2020 guidelines, issued by the Insurance Regulatory and Development Authority of India (IRDAI), all life, general and standalone health insurers were advised to include features that would entice policyholders to choose to stay fit. This stands to further IRDAI’s vision to achieve “insurance for all” by 2047 — a plan (as outlined in a press release dated November 25, 2022, from the regulatory body) that aims to increase insurance penetration in the country.
Essentially, this shift in the industry — to employ behavioural science in insurance —treats the cause and not the effect. It is a proactive insurance outlook that looks after you while you live, instead of only taking care of you when you’re ill (in the case of health insurance) or those you leave behind (when it comes to life insurance). The majority of sudden life and health insurance claims are lifestyle and behaviour-led, which then means that targeting the cause will work to avoid a claim. For example, a new motor insurance rule issued by the IRDAI allows customers to opt for auto insurance add-ons based on the way they drive — meaning that insurance companies can offer pricing based on behavioural factors like driving speed, car usage, etc.
Many health insurance companies have started investing in data science and analytics to understand a customer’s needs and rewarding customers for their healthy behaviour — I remember Aditya Birla’s Activ Fit policy being one of the first movers in this space. Life insurance, on the other hand, is still to make headway in this direction, but it’s certainly on the horizon.
According to IRDAI’s Annual Report 2021-22, life insurance penetration alone was at 3.2% in 2021 — a percentage that is slightly above the global average. While direct-to-consumer (D2C) distribution is still nascent in India, D2C insurtech channels are on the rise. After all, the unprecedented growth in data access today lets insurance companies study user behaviour and employ behavioural science tactics by incentivising and rewarding good behaviour. As the Boston Consulting Group outlines in its report on the Future of Fintechs in India, this data access is thanks to the growing smartphone penetration (an expected 1130 million smartphones by 2025, as opposed to 600 million in 2020), an anticipated 900 million total internet users in 2025, and declining cost of data. With smartphones and smartwatches keeping track of an individual’s sleep, workout regime, eating habits, geolocation, and even their online footprint, it has become easy to record an individual’s behavioural patterns, and not only reward their good lifestyle habits but also motivate them — and others in their circles — to live a healthier life. This encouragement of behavioural changes in the policyholder, accompanied by swift advancements in technology that allow insurance providers to track the health and fitness of the individual, is bound to result in massive transformation in the life insurance sector — which we are already noticing with players like Tata AIA Insurance who have riders like the Tata AIA Vitality Protect wellness program.
Separately, the IRDAI is employing new-age technology and encouraging insurers to do the same, in order to enhance customer experience and efficient data access. the creation of the National Health Stack (NHS) — a digital framework created to facilitate the collection of health records and deploy healthcare initiatives — is expected to shake up the insurance industry with the data that will become available. For starters, it’s safe to expect more health insurtechs in the near future, for underwriting to be based on already-available and easily accessible medical records, and an end-to-end wellness ecosystem for customers that provides innovative products and services like health advisory, monitoring and more. The account aggregator framework under India Stack — a comprehensive digital infrastructure — is another initiative that helps insurers improve efficiency and enable end-to-end digitisation of insurance.
Research also indicates that understanding insurance products and the risk they come with are rooted in behavioural science. A report on life insurance by the Geneva Association, published in 2020, introduced the octagon of behavioural insurance, which includes different observed behavioural patterns, biases, and perceptions and their relevance for understanding and predicting insurance purchasing decisions. It considers behavioural patterns like loss aversion, overconfidence, hyperbolic discounting, and so on.
This overwhelming amount of data will also result in insurers getting deeper insight into everyday lives, which will prove beneficial for both insurers and policyholders. It will allow insurers, to estimate losses and settle claims at a much quicker rate. The end-to-end digitisation of insurance will also streamline the process of buying insurance, and make it more transparent and personalised.
1 Finance has already begun applying behavioural science to finance. Our MoneySign™ assessment framework — a scientific personality assessment, based on the OCEAN framework — assesses an individual’s financial behaviour, biases and traits that guide their financial decisions. Other tools like our financial behaviour score also helps our members track their financial behaviour. Applying behavioural science in insurance is ultimately essential to the future of finance, especially if “insurance for all”, as proposed by the IRDAI, is to be achieved by 2047.
Author: Keval Bhanushali, Co-founder & CEO, 1 Finance
Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of IIA and IIA does not assume any responsibility or liability for the same.