How fast is too fast in insurance?
Most insurers would probably say that the recognizable point of an insurance process being “too fast” is the point at which poor decisions are made regarding risk. If the risk is the same either way, then there is no “too fast.” In my last blog in this series, The Anatomy of a Decision Part 1: Patience WAS a Virtue, we discussed some of our findings from the Majesco Future Trends 2017 report, and we talked about how a generational, market boundaries and technological shift was creating a culture of impatience.
In today’s blog, we’ll explore how insurers are coping with the need for speed, without the compromise of risk. We’ll look at how product adaptation and a transformed framework will benefit insurers by positioning them to meet needs with immediacy. Because human decisions are being made faster than usual, it places the onus upon insurers to create products that can be quickly and easily understood to drive sales and service ease. It also means building a framework that supports quick evidence gathering, rapid data transmission, instant analysis and immediate transactions.
Why is speed filled with potential risk?
There are essentially two reasons why quick decisions can be bad.
- If an insurer takes a shortcut to provide quick coverage, it may be missing key information regarding risk. Is the insurer getting the data and information it needs in a timely manner, or is it more concerned with providing a decision in a timely manner?
- If the customer is making a poor decision in order to gain quick coverage or if the customer quickly decides against coverage, they could be at greater risk. Do they understand their choices, both in terms of insurers and products? Will their choice just cover risk or help them monitor and reduce risk?
Most insurers have built-in safeguards for dealing with data and information shortcuts, employing redundancy and key indicators for potential problematic areas. If they have built a system for rapid testing, they will utilize it. When it comes to customer decisions, however, insurers may need to help prospects and customers along.
Behavioral science and rapid decisions
In our last blog, we introduced Daniel Kahneman’s book, Thinking, Fast and Slow. Kahneman describes human decision making and thinking as a two-part system. System 1 thinking produces quick reflexive, automatic decisions based on instinct and past experiences. These are “gut” reactions. System 2 thinking is slow, deliberate, reason-based and requires cognitive effort.
In an ideal world, insurers would be able to help customers to slow down and make better decisions. That world, however, has rapidly disappeared because of new expectations set based on experience in other markets or industries. Just consider Amazon continually resetting the bar.
So, it is incumbent upon insurers to rise to the new “speed” bar and create a new model for rapid, yet limited risk insurance decisions. This is a large part of what InsurTech has been trying to disrupt and change. They have been borrowing principles of speed, psychology and behavioral economics from other markets and industries in order to persuade customers to do business with them while they are making quick decisions.
The highest profile use in 2016 was Lemonade, a new InsurTech start-up darling. They recently announced their national expansion plans and have been widely cited for their disruption of the traditional insurance business model with a new one grounded in outside-in, innovative business processes, sophisticated technology and behavioral economics principles. Dan Ariely, well-known author of Predictably Irrational and other books, has helped the company create a truly different insurance experience through both process and perception.
Lemonade changed the customer experience along the entire value chain, based on Ariely’s insights about people’s decision-making processes. The AI chat-driven application and claims processes use a few simple questions, pulling in data as needed from other sources behind the scenes. Lemonade claims it takes 90 seconds to complete a purchase and three minutes to get a claim paid (though they have also extensively promoted a recent 3-second claim[i]). These simple, transparent and fast processes require less System 2 thinking by customers, creating a simplified and engaging experience while ensuring that the data used for underwriting is the most important, credible and accurate, rather than relying on human memory.
Auto enrollment, social proof and honesty pressure
At the macro level, government, academic and corporate efforts have focused on encouraging greater employee participation in saving for retirement by devices like automatic enrollment and default contribution rates for 401k plans,[ii] and improving individual health insurance plan decisions by reducing choice overload, among others.[iii] The UK government has a Behavioural Insights Team (BIT) nicknamed the “Nudge Unit” whose mission is to “use insights from behavioural science to encourage people to make better choices for themselves and society.”[iv]
At the micro level, companies like Geico employ principles like social proof (i.e. “people like you choose…”) to increase shoppers’ confidence and nudge them toward selecting specific products and closing the sale immediately. This kind of evidence is designed to quickly move people off of the fence of indecision and into the security of the social community insurance fold.
Lemonade tackles the question of customer honesty by employing a social benefit component. They take a 20% flat fee off the premium paid, with the balance used only to pay claims, then give any excess to a charity of the customer’s choice. This sets up a quasi-“moral commitment” for the customer to act in the interests of that organization (by behaving responsibly and not filing a claim that will reduce the benefit to the charity). By explaining their model up front, they gain the mental ascent to honesty during the crucial application phase. An applicant isn’t just buying insurance, they are “buying into” a bigger promise that includes risk protection when needed and support of a worthy cause for every dollar unused for claims.
All of these efforts help make both fast decisions and good decisions, significantly reducing or eliminating risk to gain speed in the process.
Shifting up to the next gear
Seeing how changes to customer-facing engagement can both improve and speed up decisions, we’re now faced with the impact of those decisions on technology throughout the business. Is it possible for insurers to innovate fast enough to make quick decisions pay off? Because the need for speed touches so many different areas of the business, insurers wanting to rewrite decision methodology may need to act more like startups — innovating from the outside in. In the Future Trends report, Majesco advocates that insurers re-imagine the insurance business by creating a new business model that embraces the demographic, market boundary and technology changes rather than restructuring the old model.
“[the] danger and the friction that can result from dynamic technology grafted onto static models will result in disruption and challenges. The opportunities that can flow from them meanwhile will continue to shape ecosystems and industries and the winners within.”
The new ideal is a cycle of continuous insight and improvement that may bear unintentional yet valuable fruit. When an insurer transforms itself to meet the demand for quick decisions on its standard products, it will also be laying the groundwork for systems that will support new product development — products that currently lay outside of its realm. Once an insurer is prepared to gather evidence quickly, quote quickly and engage with speed — then every insurable person, event or property becomes a new opportunity for business. It is within today’s fast-paced lifestyles where insurance is likely to find new lodes of business opportunity from unserved or underserved markets and customers. Insurers that understand the nature of good decisions in a time-crunched culture will meet new customer needs without compromising themselves.
For a deeper look at how lifestyle trends are impacting insurance technology decisions, be sure to read Future Trends 2017: The Shift Gains Momentum.
[i] O’Donnell, Anthony, “Lemonade Reports Insurance Claim Paid in 3 Seconds with No Paperwork,” Insurance Innovation Reporter, January 5, 2017
[ii] Choi, James J., Laibson, David, Madrian, Brigitte C., Metrick, Andrew, Defined Contribution Pensions: Plan Rules, Participant Decisions, and the Path of Least Resistance, The National Bureau of Economic Research, December 2001
[iii] Thomas, Sarah, Bandyopadhyay, Sunandan, Layug, Larisa, Carter, Ryan, “Navigating coverage: How behavioral factors affect decisions in health care plan selection,” Deloitte University Press, November 21, 2014