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.
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.