Simple Products
If it takes nine hours to read the online contract for Kindle e-readers, and this is considered simple compared to current insurance contracts, have we gone wrong somewhere? Robert Kerr explores the benefits and drawbacks of increasingly complicated insurance products.
“If I had my way, I would write the word ‘insure’ upon the door of every cottage and upon the blotting book of every public man, because I am convinced, for sacrifices so small, families and estates can be protected against catastrophes which would otherwise smash them up forever.” Winston Churchill
Insurance products have been around for a long time. In recent years we have seen products become increasingly complicated with the addition of more minor benefits and conditions. This has been to provide a competitive advantage by scoring higher with the rating houses.
Does this benefit the consumer?
Most people believe that choice is good for you. In many cases this is true. Where you already know what you would like then having the choice allows you to access what you would like. This is the basis of the supermarket where choice means you are more likely to be able to buy what you desire.
However, where you have limited knowledge, then choice makes it increasingly hard to truly compare products[1][2]. This has also been shown to be true for insurance products[3][4]. This leads to customer confusion about what the product delivers. This is known as a decision conflict situation. Individuals change their decision making process from one of maximising their satisfaction to one of choosing a satisfactory option. This customer confusion means customers cannot identify products which meet their needs even when the market provides them. This leads to customers becoming less engaged, putting off the decision and ultimately not purchasing.
Are our Products complex?
A recent article by Choice[5] highlighted that it took nine hours to read the online contract for Kindle e-readers. I know I haven’t read mine and I’m sure few people have. But these contracts are simple compared to current insurance contracts.
Insurance Council of Australia recently published a paper[6] on consumers with product disclosure statements. This highlighted some significant gaps between the consumer’s belief of what the product offered and the actual product offering. These are products which consumers are used to purchasing. I expect these gaps are greater for life insurance products.
When comparing the readability of our current products the Flesch Reading Ease[7] was below 30. This indicates that it is only suitable for university graduates.
What is Simple?
The UK government did a review into simple products[8]. This produced nine principles for simple financial products (i.e. banking and insurance). Some of these are
- Essential product features. Simply explained.
- Useful for the consumer and meets the needs of the target market.
- Clear, straightforward and standardised language.
- Product names that clearly identify the nature of the product.
- Conditions, options and exclusions are limited to what is appropriate, reasonable and necessary for the product, and are simply explained.
- A clear pricing structure which is easily understood by the consumer and allows products to be compared with one another.
- Clear methods of informing the consumer about the current prices.
Simple is about the consumer. Simple to understand and simple to use. Taking an analogy from the car industry, many recent developments are technically very complicated. For example, auto-parking, collision avoidance, changing lanes technology etc. However they have been aimed at improving and simplifying the customer experience.
Do we need simple products?
Despite the introduction of insurance in super, Australia still has an underinsurance gap[9]. In particular this gap exists for young families and individuals on lower incomes.
At the Actuaries Summit, Renee Hancock[10] from Good Shepherd presented on microfinance. Good Shepherd provides basic financial assistance to those with limited or no financial resilience. They have recently developed an Essentials Insurance cover for car insurance and contents insurance for this market.
Developing simple products for life insurance would help provide the cover that is required towards providing financial security for customers. Simple products would allow customers to simply purchase a good quality, ease to understand, product. This would be a good step towards improving the availability of life insurance and reducing the underinsurance gap.
These simple products may not contain all the non-essential product features and may be lower ranked by rating houses. However, I feel it is more important to have some appropriate good, and essential, cover than the best cover.
This could lead to improved engagement in life insurance, understanding of the products, and consumer trust in our industry.
Our current products can also be improved. Products can be better targeted towards particular needs. Benefits payable can be simplified. Product documents can be more clearly highlight the benefits and improve readability. This would make it easier for customers looking for a more bespoke product to be able to meet their needs.
This article is drawn from a presentation to the 2017 Actuaries Summit. You can access the full presentation and audio.
Summary
Insurance is traditionally an area which is difficult to understand. Recently the products we offer have become increasingly complex. Unfortunately this can disengage customers from a product which they need to ensure they provide for their families.
There is a need for complex products which offer more cover and are tailored to an individuals need. But there is also a need for simple products to engage more with some of our potential customers and meet their essential needs.
As Winston Churchill said for a small sacrifice families can be protected against catastrophes which would otherwise smash them up forever.
This article reflects my own views and opinions and not my employer or any organisation I am associated with.
[1] http://faculty.washington.edu/jdb/345/345%20Articles/Iyengar%20%26%20Lepper%20(2000).pdf
[2] http://www.news.com.au/finance/business/retail/three-in-five-australians-find-the-overabundance-of-choice-on-the-shelves-makes-it-harder-to-choose/news-story/322aa4a9ff7122825872b16f0a0fc609
[3] http://jama.jamanetwork.com/article.aspx?articleid=2475470
[4] https://www.cmu.edu/news/stories/archives/2015/december/health-insurance-complexity.html
[5] https://www.choice.com.au/about-us/media-releases/2017/march/nine-hours-of-conditions-apply
[6] http://www.insurancecouncil.com.au/issue-submissions/reports/consumer-research-on-general-insurance-product-disclosures
[7] https://en.wikipedia.org/wiki/Flesch%E2%80%93Kincaid_readability_tests
[8]https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/191721/sergeant_review_simple_products_final_report.pdf
[9] http://ricewarner.com/australias-relentless-underinsurance-gap/
[10] http://actuaries.asn.au/Library/Events/SUM/2017/ReneeHancock.pdf
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