In July, we piloted sending protection plan statements to a small group of our customers. Whilst this in itself is not exactly ground-breaking stuff, as an industry we’re perhaps more used to engaging with advisers than directly with our customers.
Because of this lack of communication, do consumers trust us or fully understand the products they’ve taken out? And what about all those valuable additional benefits customers get with their plan that probably went in one ear and out the other when you were making your recommendation – do we really expect them to remember about these once their plan is in place?
At Royal London we’re working hard to address these issues and the launch of plan statements is just the first tentative step in the right direction. Initially, we’ve only sent these to around 5,000 customers so we can gather their feedback and build this into a full rollout out to all our customers next year. Ultimately, we want to remind customers of the importance and value of the cover they have as well as reminding them about the benefits of their plan. And recognising the important role of the adviser in the relationship, we’re encouraging our customers to speak to their adviser to make sure their cover is still appropriate for their needs.
Don’t worry - we all make irrational decisions!
When designing our plan statements, we used the principles of behavioural economics to look at ways in which we could encourage positive action from our customers and avoid the trap of being confined to the coffee table drawer unread like so many other financial statements. Whilst behavioural economics has been around for some time, like many things the finance industry has been a bit slow on the uptake. If you’re not familiar with behavioural economics, in a nutshell it is based on the principle that human beings are irrational and make decisions based on a number of biases and heuristics (‘rules of thumb’). They make decisions that don’t fit with the ‘best’ decision that rational, self-interested behaviour would predict (otherwise surely everyone would have protection?!). You’ll be glad to know that I’m not going to try to educate you on all the principles of behavioural economics – there are far more knowledgeable sources on the subject (I recommend Richard Thaler and Cass Sunstein’s book Nudge for that). I’m just going to summarise some of them here:
- Loss aversion – people will work harder to avoid losing something than they will to gain it
- Power of now – consumers engage less with future events than they do with current events
- Scarcity value – when we think something is scarce it has a greater value in our eyes
- Goal dilution – it is harder to achieve multiple goals than goals pursued individually
- Chunking – the way a task is presented affects people’s willingness to take it on and complete it
- Price perception – price should be a consequence of the value people attach to something but in reality the price that is demanded makes us value it
- Choice architecture – how choices are presented influences final choice
You’re probably familiar with some of these and are exposed to them on a daily basis without even realising. For example, have you noticed that the minimum suggested amount next to the first tick box on charity forms seems to have crept up to £5 or even £10? That’s because they know most people just want to tick a box and have the decision made easy for them. It also suggests that this amount is the norm or the ‘default’ so people are more likely to go with that.
But how can we apply these principles to protection?
The value of you
If all your clients behaved rationally then they’d be queuing up to buy protection as it’s the logical thing to do. After all, the stats show that half of us born after 1960 will get some form of cancer in our lifetime1, and there’s a 25% chance of a 40 year old male non-smoker being off work for two months or more with an illness or injury2. Even when presented with these irrefutable facts, the vast majority of people still don’t take out cover. That’s because they’re heavily influenced by external factors driving irrational behaviour – the negative articles in the media, their family etc. These all work against their decision to buy protection.
When designing our plan statements we tested two key principles – the power of now and loss aversion. The power of now suggested that customers could consider plan statements as a negative prompt to reconsider expenditure but also that the need for a continuous and consistent self-image means they’re more likely to continue with an action they’ve previously committed to. And with loss aversion, the loss customers seek to avoid (death or illness) is difficult to confront directly. With the former, we tested congratulating customers on their choice to take out a protection plan and with the latter we challenged customers to put a value on themselves to demonstrate how important their cover is. By creating a range of prototypes, we were able to test a number of messages and layouts and incorporate customer feedback into our final statement design.
But of course the real test will be how customers respond in a live environment – will they contact their adviser to arrange a review meeting, start using the valuable benefits available through their plan or will they cancel it completely? Time will tell but initial feedback shows that the statements have been well received and not one single customer out of the 5,000 we mailed has cancelled their plan as a result of receiving one.
As I said earlier, this is just the first step in us trying to engage with our customers which can only be a good thing both for us and advisers. Longer term, we’re looking at how we can engage digitally which presents its own challenges in terms of data and security. But one thing I’m sure of, behavioural economics can be a valuable tool in supporting customers to make the right decisions and helping to address the protection gap that exists today.
*Sources: 1 – Cancer Research UK, http://www.cancerresearchuk.org, September 2017; 2 - Royal London risk summary report. Based on Hannover Re’s interpretation of the Institute and Faculty of Actuaries’ Continuous Mortality Investigation insured lives incidence rates together with their estimate of future trends. Incidence rates for the entire population may be different to those lives that take out insurance products.