By Andrea Silvello and Celia Clinciu
A professor at the University of Chicago, now 72 years old, Richard H.Thaler was awarded the Nobel Memorial Prize in Economic Sciences for his contributions to behavioural economics. His core work is Nudge, a book he co-wrote with Cass R. Sunstein. In this book, the authors make the case for why nudging people towards certain behaviours that are beneficial for the individuals and for society as a whole, is positive.
Application of Nudge
His work has contributed to the creation of behavioural economics and could have major implications for economic research and policy according to the Nobel committee.
According to Thaler and Sunstein, even “small and apparently insignificant details can have major impacts on people’s behaviour”. So, whoever presents choices must frame them in some way and the framing will affect the decision making.
The nudge approach has already been tested in different contexts, one of which is the UK government’s 2012 policy of auto-enrolment for private pensions. It is a great example of how a nudge policy can have benefits. It led to considerably higher private-sector, pension-saving participation because individuals can opt out but are otherwise considered enrolled.
The unexplored potential of microinsurance
With the particular focus on the smartphones, the main proxy of today’s customer, Insurtech has introduced the concept of microinsurance. It refers to the insurance policies of limited duration and contained costs available directly on the client’s smartphone with no paperwork. Currently, microinsurance covers around 135 million people, which represents about five percent of the entire market potential, with an average of 10% annual growth rate. The risks covered by such solutions are the typical ones of the traditional insurance market: life, health, accidental death and disability, and property insurance.
Approximately 70% of the world’s seven billion people live in poverty which makes the case for a high demand for certain insurance products like health and life, agricultural, and property insurance, even catastrophe covers. An estimation of the potential market for insurance in developing countries is between 1.5 billion and three billion policies.
Microinsurance, microfinance, microcredit
Microfinance and microcredit are commonly associated with the more poor, developing countries and by association, so is microinsurance. Nevertheless, the latter has a different kind of business potential. Microinsurance is not just a short time insurance coverage at a reduced cost for people in developing countries. It is an innovative way of selling insurance that is aligned with customer expectations while covering a specific need, at the right moment, at the right price, in a customer-centric approach – or so it should become. This type of insurance could help close the protection gap, both in developed countries and developing ones.
The role of microfinance, in contrast, is to create “a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high-quality financial services, including not just credit but also savings, insurance, and fund transfers.”
Microcredit means providing credit services to those with low income. It is an extension of small loans to impoverished borrowers who typically lack collateral, steady employment, and a verifiable credit history.
Provided that people who live on a low income are offered the right service, means, and knowledge, they will become effective consumers of financial services. The MicroInsurance Centre estimates that in the next 10 years or so, the microinsurance market could grow to one billion policy-holders, representing a third of the potential projected three billion markets. It is important not to take insurance demand for granted.
Insurance often has a negative connotation in the developing world which stops it from reaching more people. The market needs an innovative approach based on customer education and incentives. The advantages of having an insurance cover have to be clear in the minds of potential customers and for that to be achieved, trust and information are very important. There are several mediums which can help in accomplishing this task like agents on the field, TV and radio program plotlines, or even literacy campaigns. To create demand, other types of incentives can also be used, including tax exemptions, subsidies, or compulsory cover.
Scope of microinsurance in a developing nation
For microinsurance to function in a developing country the products and the processes to be put in place must be simple and the premiums need to be kept low. This can only be achieved if incumbents change their mindset and implement an efficient administrative strategy combined with the right distribution channels. Insurers will have to find the right business model and partners when approaching such markets and should consider less common mechanisms for controlling moral hazards, adverse selection, and fraud. At first, investing in microinsurance might seem a bit reckless, but the returns become gradual over time. It starts with reputational gains in the short term, knowledge in the medium term, and growth in the long term.
Despite the trends, fewer than five percent of people with low income have access to insurance or to the covers that they need. Even though these qualities make underdeveloped countries an ideal market for the insurance industry, it is not applicable in developing countries. On the contrary, it could be even more successful in developed economies where people have even higher access to information, smartphones and internet.
Thaler’s nudge for microinsurance
Insurance should adapt to the customers’ habits and their environment. The best way to do that is by selling microinsurance that has a short duration with a push approach. It is called a push approach because the insurance seeks the client out and not vice-versa. This could be interpreted as a gentle nudge that arrives exactly when the client needs it, directly on his or her smartphone, offering protection against an immediate and perceivable potential risk. Machine learning and AI have evolved to such a degree as to allow a detailed profiling of the potential customer and its context. As Thaler suggests in his book, the context makes everything and helps conclude the sale or not.
Thus, by interpreting the variables that could influence the customer, a good AI-based solution should be able to capture the precise means and moments to deliver short period insurance offers to truly interested users. The trick is to avoid annoying customers with offers that do not interest them directly, at the wrong moment. The answer is an AI-based solution which can correctly interpret different types of data coming from the customer.
The key to selling insurance to Millennials and the whole ‘connected generation’ is to reach them with the right message, at the right time. Companies should get customers’ attention by using the same channels that they use. This might be the perfect moment to develop solutions that are able to nudge people into behaviours that can benefit them, offering short-term coverage for atypical situations that would otherwise remain uncovered. A good step towards closing the protection gap from an insurer’s perspective.
Featured Image Source: Pixabay
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