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Published in Mint on 11th February,2015, Written by Kapil Mehta
The way information is presented has a dramatic effect on decisions. This is certainly true in insurance. The impact is positive if a buyer is guided sensibly, and negative, if salient points are buried deep in documents and legalese.
A friend manages a trust that has adopted five hundred daily wage earners. These workers spend Rs.300 each year to buy insurance for a sum assured of Rs.1 lakh. Unfortunately, a worker died recently due to medical complications but his death claim was denied. “Could I look into it?” my friend asked. Well, it turns out that the insurance cover was only for accidental death. I couldn’t have guessed that by reading the website or even the brochure. Only the policy contract spelled this out clearly. This word-crafting had tragic consequences.
Buyers often postpone an insurance purchase because they have heard some such horror story on claims.
Regulators and insurers are paying more attention to how insurance facts are presented or “framed”. A 2015 World Bank report, Mind, Society and Behaviour, describes a research where customer borrowings came down substantially when costs were shown in absolute amounts rather than as interest rates. Another study, Framing, Probability Distortions and Insurance Decisions, published in the Journal of Risk and Uncertainty, highlighted that people will pay twice as much for insurance if the causes or risks are vividly described. For example, in an overseas travel insurance people will pay more to buy two insurances, one covering terrorism and the other accidents unrelated to terrorism, when compared with buying a single insurance covering all accidents. The same principle applies to critical illness where buyers will pay more when diseases are named in detail. When a few primary diseases are broken up into a larger number of sub-diseases, the cover looks comprehensive.
Framing information well improves the buying decision and prevents mis-selling. Successfully presenting information requires effective benchmarking, highlighting only a few important features and providing relevant claims information.
Benchmarks must be easy to relate to. Take the case of traditional life insurance endowments that are over 70% of life insurance sold. In these insurances it is mandatory to illustrate maturity values assuming an interest rate earned by the insurer. What buyers do not realize is that their own returns are lower because insurer’s expenses get deducted. It’s better to illustrate actual returns that policyholders can expect to earn. This means that buyers should know that their earnings will be 2-5% rather than the illustrated 4-8%. The next logical step is to compare life insurance returns to long-term fixed deposits or similar products.
The way annual bonuses are expressed, as a percentage of sum assured to be delivered when the insurance matures, is confusing. Buyers misunderstand this to be an annual interest rate, which it is not. A 10%-bonus may mean an annualized return of 3% or less.
Putting information in a way that buyers easily relate to helps them make the right choices.
There is a limit to the information a buyer can absorb. A good insurance salesperson will intuitively present fewer but relevant options to a buyer so that decisions get taken fast. A one-page note is likely to be read; a 20-page memo never.
So, identifying and effectively highlighting just three or four aspects of the insurance being bought helps. Several insurances have a key features document as well as detailed policy contracts but they are too long and complex. Conveying information succinctly is difficult. In the daily wage earner example, the document should have prominently mentioned that only accidental death was covered. To remove all doubt it should have specified that death due to illness was excluded.
Another case that illustrates how important it is to highlight just a few points relates to a senior executive. His unit-linked insurance plan was cancelled mid-term despite the fact that he had paid all his annual premiums regularly for five years. On complaining, he was directed to clause 20 in the policy contract that allows cancellation mid-term if the fund value fell below a 110% of the premium. Subsequently, the insurer increased the premium for reinstatement by 50% because, it said, costs had gone up. We discovered another clause permitting this. All of this was a surprise to the executive. Shouldn’t it have been a key feature that the insurance could lapse even if all premiums have been paid?
People buy insurance to reduce their risk and expect claims to be paid. This is why sharing risk and claim information at purchase is necessary. A health insurance brochure should carry claim approval rates for that product as well as the top three reasons for rejection; a term plan could have similar information. The personal accident brochure could mention that in India about 5% deaths each year are due to accidents. Wouldn’t this encourage buyers to purchase a full cover term insurance? A burglary insurance should specify that most claims get rejected because the thefts are by an insider, which is not routinely covered.
Sharing information like this will benefit the industry in the long term. The immediate impact will be for buyers to question their insurance more and for differences across insurers to stand out. Insurance sales are over $30 billion, or Rs.1.8 trillion. That’s a lot of people buying insurance and we owe them a clear view of what they are buying.