Insurers have historically relied on two streams of information to inform underwriting decisions - underwriting manuals and automated decision management platforms. Today, a third stream – behavioral science – offers insights that can improve the decision-making process.
Next: Explore ˿ƵAPP’s behavioral science case studies to learn how implementing the underlying principles can transform small changes into big results.
In the 1984 cult classic Ghostbusters, one of the biggest dangers when it came to ridding the city of specters was for the ghoul-fighters to cross the streams emanating from their proton packs.
Doing so, viewers were told, would be akin to all life as we know it stopping instantaneously with every molecule in our bodies exploding at the speed of light. So some hesitation is understandable when anyone suggests that there are times when crossed streams are a good thing.
This is one of those times.
Historically, two major streams of information helped with automating underwriting decisions:
Today, a third stream is helping inform even better risk assessments – behavioral science. This scientific field has led to greater understanding of why and how humans do what they do and, in the process, provided meaningful risk management insights.
With the evolution of the industry toward greater use of technology to enhance risk mitigation, it might seem counterintuitive to step aside for a moment from the digital world to create a third stream of information. But when that third stream is dictated by a supercomputer whose full power we have not fully unlocked, it starts to make more sense.
That supercomputer is the human brain.
As advanced as we are as a species, we still are in the early stages of truly understanding the science of human behavior. We might think we know why people do what they do, but only recently have we started to apply scientific research studies to understand the complex interactions that underlie human behavior.
To understand the power of behavioral science in the insurance industry, let’s look at an example.
˿ƵAPP’s Behavioral Science team asked a group of hypothetical insureds, “Have you ever used tobacco or nicotine substitute in any form?" and gave them two boxes – “yes” and “no.” Nearly 35% of respondents said they have ever used tobacco, with nearly 20% saying they have used it within the past year. That left 65% who said they have never used tobacco.
But when we reworded the question, we found something interesting. We asked a different group of respondents: “When was the last time you used tobacco or nicotine substitutes?” Six choices ranged from “In the past month” through “Between 1 and 5 years ago” to “Never.” Logic would suggest that 35% of respondents should have checked the boxes corresponding to increased risk.
But human behavior isn’t necessarily logical.
The reworded question yielded more than 51% who disclosed prior tobacco use at some point in the past, and more than 30% who said they had used it within the past year. That's an additional 16% who disclosed prior tobacco use, with another 11% saying they used it within the past year.
The difference was even more stark when it came to just cigarette use.
This example shows the power of behavioral science as an information-gathering tool to inform better underwriting decisions. The industry is discovering ways to ask questions that result in more accurate disclosures about everything from alcohol consumption to exercise habits.
Behavioral science also is uncovering new insights about something called “cognitive load.” The assumption with the smoking question might be that it is more of a stress on a potential applicant’s brain power to answer a question that has six choices rather than a question that has two. That isn’t necessarily true.
Behavioral science research has demonstrated that survey questions with a range of options can be less of a challenge – hold less cognitive load – than those with just two choices. Why? Because people tend to fit their behaviors more easily into one of a range of categories than they are to one of two. On top of that, the data shows that people tend to be more accurate disclosing underwriting risk when presented with that range rather than a binary choice.
The bottom line is this: We now know that it is psychologically easier to answer this new question because we are taking into consideration the fundamental motives that drive all our behaviors and decisions.
In essence, the newly worded question protects the ego. Changing the question hook from “Have you …” to “When did you last …” assumes the behavior exists and it is merely a matter of when. Assuming the behavior exists normalizes and de-stigmatizes the behavior, which may reduce any feelings of shame, guilt or embarrassment associated with disclosure. This psychologically maintains the sense of self – the ego.
Providing a range of choices does the same while fulfilling our industry’s need for accuracy. It allows respondents to maintain a consistent self-image by not requiring them to label themselves as a “smoker” or a “drinker,” which carries negative connotations.
For several years, the three streams – underwriting manuals, automated underwriting decision-making platforms, and behavioral science research – have followed parallel development courses in our industry.
But effectively integrating these streams remains an ongoing field of study. For example, behavioral science could determine that a question should be asked in a certain way with certain visual clues or expanded choices to produce optimal disclosures. However, that question might not be technologically feasible in insurance underwriting or policy placement systems, or it might include data values that don’t fit into a range outlined in guidance found in underwriting manuals.
As we step away from parallel, independent development of these three streams and start to cross-pollinate strategically, the importance of working collaboratively becomes increasingly apparent.
The winners will be those companies that proactively lay the foundation for even greater integration to come. As we have found by crossing the streams at ˿ƵAPP, when done effectively, our clients and their customers enjoy the best of all worlds: faster, more accurate underwriting decisions and a better insurance applicant journey.
Explore ˿ƵAPP’s behavioral science case studies to learn how implementing the underlying principles can transform small changes into big results.
