Financial advisers play a critical role in the insurance value chain. Data from Discovery Insure indicates that as much as 70% of new business is written through financial advisers. This shows that many clients trust their financial adviser for their insurance needs and risk management advice. However, a concerning trend is that some advisers give incomplete or inaccurate advice, such as not explaining policy terms and conditions, which can impact the outcomes of claims. We investigated the details of this and whether behavioural economics can help us explain it so that we can offer better support to advisers.
Behavioural economics of errors
According to Investopedia, “behavioural economics is the study of psychology as it relates to the economic decision-making processes of individuals and institutions.” It can help us understand why people do the things they do.
When it comes to thinking, behavioural patterns, and decision-making, we often repeat the same mistakes. The reason for this is because of the way our brain processes information and creates templates that we can refer to over and over. These templates are essentially shortcuts that help us make decisions quickly. But these shortcuts – known as heuristics – can also make us repeat our errors.
Other behavioural economic ideas that influence decision-making include cognitive biases such as confirmation bias, where advice may be based on pre-existing beliefs, which can lead to incorrect advice; and social influences such as conformity bias, where someone can change their beliefs to align with a larger group. Incentives are another interesting consideration. For instance, an adviser may have a financial incentive to provide certain advice, even if it is not in the best interest of the person seeking it.
How this shows up in practice
1. Repeating the same errors or not tailoring information to specific client needs.
An adviser may be selling insurance policies every day and thus “forget” to go through the basics. While some people may think that disputes at the claim stage are caused by complex issues, the contrary is true. Insurance claim data shows that many claim disputes are caused by common things that can be avoided. This is where advisers can assist clients in making sure they get the cover they want. The following are common issues that you can help your clients with:
- Explaining policy endorsements clearly
- Purchasing the correct cover based on their circumstances
- Choosing the correct sum insured – when choosing the policy sum insured, you must consider factors that affect the asset’s value, such as value-added tax, depreciation or appreciation in value over time. Insuring assets at the correct sum insured will avoid underinsurance for the client
- Capturing the correct risk details – for example, the correct risk address where assets are kept must be recorded
- Explaining the policy excess correctly.
2. Product selection and not keeping up with changes in the nature of risk.
This can also show up in the product and product provider an adviser chooses for their client. Another risk is that advisers are not keeping up with the changes in the nature of risk and how best to support their clients because they are stuck in their old methods.
Because we are human, it is hard to avoid biases completely, but these strategies can help to mitigate the impact of biases on financial advice…
Recognise cognitive biases: Awareness of biases is crucial for advisers. By actively seeking diverse sources of information and viewpoints, advisers can reduce the impact of biases on their advice.
Tailor information to specific client needs: Advisers must understand each client’s unique needs and recommend appropriate cover options that can enhance the accuracy and relevance of advice. Importantly, they must also explain key policy conditions that may impact client’s cover.
Consider incentives and conflicts of interest: Advisers should be transparent about any potential conflicts of interest and aim to prioritise the client’s best interest.
Implement decision-making frameworks: Having a structured and systematic approach to giving advice can reduce the influence of biases and ensure a comprehensive evaluation of options. This framework should consider client needs, available solutions in the market, key policy terms and conditions, and comparisons with competing products.
Continuous training and education: Ongoing training and education are vital for advisers to stay updated on industry standards, regulations, trends, and best practice. This helps advisers enhance their knowledge and skills, enabling them to offer accurate and informed advice to clients.
Collaborate with insurance companies: Advisers can partner with insurance companies that prioritise ongoing product enhancements, comprehensive training solutions, and tools that support accurate and tailored advice. This collaboration ensures advisers have access to the necessary resources and information to provide high-quality advice to clients and thus improve client outcomes.