behavioural economics its influence on insurance. · actuarial society 2015 convention 17 – 18...

Actuarial Society 2015 Convention 17 – 18 November 2015

Behavioural Economics – its influence on

insurance.

Peter Temple

Actuarial Society 2015 Convention 17 – 18 November 2015 AIMA X – 10thScientific Conference

12 to 14 October 2015

2


ECONOMICS

Source: Mindspace: Influencing behaviour through public policy; Cabinet Office; Institute for Government

Actuarial Society 2015 Convention 17 – 18 November 2015 *Source: Robert Cialdini; Influence: The psychology of persuasion


BEHAVIOURAL ECONOMICS



7

Defaults Incentives

Norms

Messenger

Salience

Priming Affects

Commitment

Ego



18.1

57.8


Finding ….behavioural economics

9


Manipulation of a nation The same world…. But different

• On-line experimenters

• Experiment Informed

programmes

• Computational advertisers

• Text analytics

11


An experiment in social contagion

For each additional positive post

in the experiment, there were 3

less negative posts

12


An experiment in social contagion

13


100% chance to

win

R 9000

B

95% chance to lose

R 10 000

5% chance to lose

R 0 C

100% chance to

lose

R 9000 D

95% chance to win

R 10 000

5% chance to win

R 0

A OR OR


Finance bias

Default Anchoring

Loss

aversion

Hyperbolic

discounting

15


Overconfiden

ce

and

Optimism

Individuals are generally overconfident in their own abilities

and prospects,

including their health

Loss

Aversion

Individuals generally dislike losing something twice as much as

they like gaining something.

Rewards through financial incentives have been proven to be

successful in incentivising healthy behaviour

Frequent

Event

Miscalculation

Positive reinforcement and indirect suggestions can influence

the motives, incentives and decision making of individuals to

positively impact on their health and wellness

Hyperbolic

Discounting

Individuals tend to pay little attention to the small but

cumulative consequences of repeated decisions and frequently

ignore the impact of repeated risky behaviours

Future rewards of a healthy lifestyle are significantly

undervalued relative to cost today

People continue to follow the path of least resistance when it

comes to decisions about their health and wellness

Nudge

Theory

Status

Quo

Bias

Financial

Incentives

Source: Value creation through behavioural life insurance; Adam Stotz and Greg Morris; Actuaries


• Q: Do you drink alcohol ? Yes/No

• A: No. I only ever drink beer

• Q: On average, how frequently do you consume

alcohol?

• A: No current alcohol consumption and only over

weekends and mostly on social occasions

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How much alcohol do you drink …

* Well known brand in South Africa ! 18

• Q: Do you drink alcohol ? Yes/No

• Q: If yes, state the quantity and type of alcohol per week.

• A: Most common answer is 3 units

• Q: Does the life assured regularly consume more alcohol than the equivalent of 20 beers per week

• A: Average answer is never more than 20

• Q: What quantity of alcohol do you drink in a week?

• A:

• Q: What kind and quantity of alcohol do you drink

• A: Per day : 3 glasses of red wine and 3 Three Ships whiskey per week

• A: Per week : 10 Beers and 3 bottles of red wine

5-12 units 1- 4 units 12-20 units Decoy

Anchoring

Cultural

norms

Anchoring

Framing


Vitality health impact

19

Unengaged Moderately

engaged

Highly

engaged

Mortality

Morbidity

Part

icip

ants

Life insurance claims experience: health

programme participants

Non-

participants

Source: Value creation through behavioural life insurance; Adam Stotz and Greg Morris; Actuaries

Institute 2015 Actuaries Summit


Moving underwriting models

One assumption for heterogeneous lives

Information once off, ONLY at inception

No way to adjust to changing pattern

STATIC

DYNAMIC

Reward engagement of with accurate risk assessment and dynamic product design

“Nudge” the customer to optimal behaviours and improvement of health

Enable the customer to actively engage in changing & improving health pattern

Product

Re-design

Guaranteed

premium

paybacks

Cash

conversions

for unseen

events

20


The Tipping Point

Marginal benefit of additional information

Ma

rg

ina

l c

ost

of a

dd

itio

na

l s

ea

rc

hin

g

The point at which

Behavioural Economics

matters

21


A specific example

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

GPR SAR

Decline

Postpone

Load

Standard

22


Rating impact: Example results

Sum Assured Bands

Age 1 2 3 4 5 6 7 8 9

20 98% 97% 97% 97% 98% 98% 97% 98% 88%

25 96% 97% 97% 97% 98% 97% 97% 98% 93%

30 98% 97% 97% 97% 97% 97% 97% 96% 92%

35 97% 97% 97% 97% 97% 97% 96% 94% 92%

40 96% 96% 97% 97% 96% 96% 93% 95% 93%

45 96% 96% 96% 95% 94% 93% 92% 94% 93%

50 96% 96% 95% 94% 93% 93% 93% 93% 93%

55 96% 95% 94% 95% 93% 92% 93% 93% 93%

60 94% 94% 91% 92% 93% 91% 93% 92% 94%

65 94% 92% 91% 92% 92% 91% 92% 94% 93%

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“Rational

Mean”

Under save with dramatic consequences

Over-insure with minor cost consequences

Source: When does Behavioural Economics really matter; Ian McAuley; Australian economic Forum; 2010

Extreme departures on a

collective scale - consistently

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Should it really matter ?

Survival in a disrupted world

25


On

26

66.6%

23% On-line Non-insurers

Source: Harvard Business Review ; Insurance Isn’t Safe from Digital

Upheaval; John. M Cusano (July;2014)


Source. The Economist Explains: How technology threatens the Insurance Business (March 2015)

27


Millennials not biting…

Per

cen

ta

ge

28


You are at the centre

of my world.

You truly are!

Product centric?

29


Source: KPMG: A New World of Opportunity: The insurance innovation imperative (2015)

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31



32

Actuarial Society 2015 Convention 17 – 18 November 2015 33


You are at the centre

of my world.

You truly are!

I am at the centre of

Your world.

I really am!

Client centric?

34

Product centric?


Source: Riederle, P. Wer wir sind, und was wir wollen: Ein Digital Native erklärt seine Generation

If the (experience)

is right from start

to finish,

customers will

come by themselves.

We’ll see to that ,

because we won’t

be customers any

longer. We’ll be

your fans.

P. Riederle

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behavioural economics its influence on insurance. · actuarial society 2015 convention 17 – 18...

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