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Accuracy: The Psychology of Direct-to-Consumer Life Applications

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What You Need to Know

  • Life insurers need complete, accurate information about an applicant to assess risk.
  • The advisor-led application process may increase the odds of some kinds of application disclosure failures.
  • The direct-to-consumer approach can lead to other types of disclosure failures.

Behavioral science is helping life insurers with an important task: confirming that life insurance applicants have disclosed information factually and correctly.

Life insurers are increasingly offering direct-to-consumer, or direct-to-consumer, application processes. That’s trend accelerated during the COVID-19 pandemic.

Consumers once completed applications across the desk from an agent or an advisor. Now, many consumers complete applications online, or through a telephone call. The shift is drawing life insurers attention to application quality.

Here’s the first in a series of three articles about what behavioral science can tell us about the life insurance application process. This article focuses on why some of the information on a life application may be missing or inaccurate.

The Motives

So, why do applicants mis-disclose or non-disclose information on insurance applications?

1. Financial gain: People prefer to avoid disclosing details that would increase their premium.

2. Psychological gain: People like to present themselves positively. Psychologists refer to the phenomenon of responding to questions in ways that might make others think better of us as “social desirability bias.”

An example: applicants might fail to disclose illegal drug use because it is socially frowned upon, rather than because they are trying to get a better deal.

3. Unintentional inaccuracy: Applicants may not know or be able to remember certain key details.

Unintentional inaccuracy can also be due to misunderstanding a question or confusion related to how to input an answer correctly.

Agents and Advisors

Traditionally, life insurance applications have been paper-based. The applications were designed to be completed alongside an agent or advisor.

There are many benefits to this approach. Agents and advisors can immediately explain unclear or difficult questions, thereby helping applicants answer correctly and avoid genuine mistakes.

However, the fact that agents or advisors receive commissions for selling insurance may cause conflicts of interest in this part of the process.

A commission that’s based mainly on sales volume, rather than on application accuracy, creates an incentive for an agent to sell, rather than to collect accurate information. That incentive could influence the application process.

In addition, application form designers have little control over how questions and clarifications are phrased by advisors in practice. This raises the possibility that advisors will paraphrase the questions and end up asking leading questions, instead of fact-finding questions.

Finally, customers may feel embarrassed about disclosing sensitive health and lifestyle-related details to another person, no matter how trusted. This could also lead to mis- or non-disclosure.

There is evidence that the risk of gathering incorrect information due to psychological factors, when the life insurance application process is advisor-led, is real.

A 2020 research paper in “The Advisor Effect on Insurance Disclosures” showed that smokers were more likely to be offered standard terms if they were screened by an advisor than if they were screened by a representative of the insurer.

The Direct-to-Consumer Process

The automated system that runs a direct-to-consumer application process collects no commissions. Given the lack of a financial conflict of interest, it is plausible that direct-to-consumer application methods should generate better applicant information disclosure rates.

But direct-to-consumer application processes have their own challenges, and there is definitely room for improvement.

The direct-to-consumer telephone process, for example, allows an interviewer representing the insurer to explain complex questions to an applicant. The interviewer’s presence generally makes it emotionally difficult for the applicant to mis- or non-disclose.

Sensitive questions, however, can cause the applicant embarrassment, even on the phone, which could lead to mis- or non-disclosure.

Such embarrassment may be lessened when an applicant is completing an application online, but use of an online system does not necessarily remove the embarrassment entirely.

In the online application process, help for complex questions is generally limited to the text provided in the form.

On the one hand, this help can be highly accurate, as it will present as intended by the insurer.

However, unlike advisor-led applications and telephone interviews, the advice on the form is static and does not enable users to immediately ask someone for more detail or clarification.

Additionally, online applications give users time to consider ways to “game” the application and improve their chances for a lower premium — a challenge shared with advisor-led applications (where advisors’ experience with applications enables them to consider how to paraphrase questions).

Interestingly, however, online applications also enable people to distance themselves from the embarrassment that might otherwise encourage intentional dishonesty in their responses.

Tomorrow, I’ll take a look at some factors that affect how likely life insurance applicants are to give underwriters complete, honest answers.

Peter Hovard is the lead behavioral scientist for global data and analytics at Reinsurance Group of America.


Peter Hovard (Photo: RGA)Peter Hovard is the lead behavioral scientist for global data and analytics at Reinsurance Group of America.

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(Image: Matthieu/Adobe Stock)