Behavioral Economics Insurance EyeOpener April 2016 An enhanced business model for the

Insurance EyeOpener
Behavioral Economics
An enhanced business model for the
insurance industry
April 2016
Agenda
1. Insurance mega trends
2. What is behavioral economics?
3. Behavioral economics in practice
4. From cutting edge science to an enhanced business model
5. Questions
Mega Trends
What is BE?
BE in Practice
Science to Business
Questions
2
The five most disrupted
Only entertainment and media match the upheaval underway in the insurance industry.
Entertainment and
media
Insurance
Banking and capital
markets
Healthcare
Q: How concerned are
Asset management
you about the potential
threat to your growth
prospects from the
following? CEOs stating
“extremely concerned”
Source: PwC19th Annual Global CEO Survey
Mega Trends
What is BE?
BE in Practice
Science to Business
Questions
3
3
The insurance sector disruption is manifest in a number of ways
Changes in industry
regulation
88%
Changes in customer
behaviors
71%
Changes in distribution
channels
Increase in number of significant
competitors traditional and new
Changes in core technologies of
production or service provision
61%
69%
50%
Q: How disruptive do
you think the following
trends will be for your
industry over the next
five years? Respondents
stating very or somewhat
disruptive
64%
61%
61%
47%
Insurance
Source: PwC18th Annual Global CEO Survey
Mega Trends
66%
What is BE?
All Industries
BE in Practice
Science to Business
Questions
4
Opportunities & Threats
Insurance executives are navigating a market filled with opportunities and threats, but there is
decidedly less optimism than a year ago
2015
59%
54%
2016
Insurance CEOs believe there are more
growth opportunities than there were
three years ago
2015
61%
63%
2016
Insurance CEOs see more threats
than they did in 2012
Source: PwC 18th Annual Global CEO Survey
Mega Trends
What is BE?
BE in Practice
Science to Business
Questions
5
Innovation
Costs
Growth
5 Urgent
Priorities
Talent
Mega Trends
Regulation
What is BE?
BE in Practice
Science to Business
Questions
6
Innovation
Data Analytics:
Was a system challenge
– now a race for talent
Mega Trends
What is BE?
BE in Practice
Science to Business
Questions
7
Innovation
CEOs see data and analytics as the leading technology
for strengthening customer engagement
79%
Data and analytics
76%
CRM systems
58%
Social media communications
Personal data security
50%
Web-enabled collaboration
49%
Source: PwC19th Annual Global CEO Survey
Mega Trends
What is BE?
BE in Practice
Science to Business
Questions
8
Innovation
Data analytics is transitioning the insurer
from a reactive claims payer to a
preventative risk advisor
Mega Trends
What is BE?
BE in Practice
Science to Business
Questions
9
Behavioral Economics at the core of an enhanced business model
Tomorrow’s winning business model seems to rely heavily on smart analytics and customer behavior analysis.
Behavioral Economics combines the two subjects into a powerful tool
BEHAVIORAL
ECONOMICS
CUSTOMER
BEHAVIOR
SMART
ANALYTICS
Behavioral Economics is where customer behavior and
smart analytics meet to form a winning business model
Mega Trends
What is BE?
BE in Practice
Science to Business
Questions
10
What is Behavioral Economics?
Most of economic theories are based on the assumption of humans as “homo-economicus” and therefore are not
entirely fit for humans
ECONOMICS
PSYCHOLOGY
HOMO - ECONOMICUS
•
•
•
•
HOMO - SAPIENS
Always rational
Self-interested
Maximizing utility
Driven by logic
•
•
•
•
Sometimes irrational
Not always self-interested
Have self-control issues
Also driven by nature
Relying only on economic theories can lead us astray in
predicating and influencing the behavior of real humans
Mega Trends
What is BE?
BE in Practice
Science to Business
Questions
11
We have TWO brains!
Our brains work as if they are the combination of two separate brains: a slow analytic brain and a fast intuitive
Slow (Reflective)
•
•
•
•
•
•
Fast (Reflexive)
Analytic
Conscious
Rational
Rule-based
Logical
New
•
•
•
•
•
•
Rule of thumbs
Unconscious
Irrational
Intuitive
Emotional
Old
This is why even smartest of people can act unjustifiably irrational at times.
Mega Trends
What is BE?
BE in Practice
Science to Business
Questions
12
Does it mean we need to re-invent everything?
The short answer is NO!
1
Our fast brain makes shortcuts to make important decision in split second
2
These shortcuts work remarkably well in most situations. However, they lead us to make bad
decisions under specific circumstances. These failed shortcuts are called cognitive biases
3
The good news is that our cognitive biases occur in specific situations and in predictable
manners - much like optical illusions
4
By recognizing and anticipating these cognitive biases, we can help our customers to avoid
mistakes that are both counter-productive and costly for them and for us. That’s a win-win!
Mega Trends
What is BE?
BE in Practice
Science to Business
Questions
13
Behavioral Economics is economics adjusted for real humans
Behavioral Economics explains why people’s behaviors deviate from predications of economic theories and how it can
be adjusted – nudged – toward rational choices
Economics
• Identifies common “shortcuts” in customer
decision making
Psychology
• Explain external variables affecting
customer decision-making
• Explains market inefficiencies
Behavioral Economics
Mega Trends
What is BE?
• Offers insights into product design, loss
control, loss leakage and marketing
BE in Practice
Science to Business
Questions
14
Examples of cognitive biases
So you think you are smart?
‒ Would you rather buy “80% lean” or “20% fat” meat?
‒ Would you drive 20 min to save $20 on a $25 toaster? What about on an $800 TV?
‒ Would you rather have a free $10 gift certificate or pay $7 for a $20 gift certificate?
‒ Do you think you are a better-than-average driver, leader, lover?
‒ Would you rather not buy ice cream to prevent over-indulgence?
‒ Would you forgo a payment of $200 in a year in exchange for a $100 payment today?
Mega Trends
What is BE?
BE in Practice
Science to Business
Questions
15
Workers’ compensation in Australia: shortening return to work
• Comprehensive review of claimant interactions
Own the
Recovery
• Targeted interventions:
- The significant simplification of processes and
communications
Early
Communications
>25%
- Removal of negative ‘primes’ in key communications
Faster Return to
Work
- Carefully articulated ‘Commitment Charters’ agreed
with claimants
• Treatment group returning to full capacity 27%
faster in the first 90 days of the trial
Commitment
Devices
Promoting
Resilience
Social
Norms
Simplification
& Primes
Mega Trends
What is BE?
BE in Practice
Science to Business
Questions
16
Workers’ compensation in Australia: shortening return to work
Behavioral Economics interventions can achieve real and sustained behavior change, if applied properly at a number
of claimant touch points
Claimant Lifecycle
Behavioral Interventions
• Sensitive to Signals
Before BE
Intervention
Pre Event
Transactional and
administrative in
nature
• Social Interactions
Incident
Intervention
Focus on eligibility
Sometimes confused
and process with legal
messaging around
emphasis; chance of
next steps,
suggestive language administration burdens
(priming)
and backward looking
conversations
Follow Up
Routine and
mechanical follow up
• Framing Each Experience
• Plans & Commitments
Mega Trends
After BE
Intervention
• Simplicity & Paths of Least
Resistance
Relationship is defined Immediate positive
and goodwill
framing; collaborative
established to shape
return to health focus;
future decisions
build on goodwill
What is BE?
BE in Practice
Clear, simple and
consistent
messaging about
shared obligations;
forward looking focus
Science to Business
Momentum
maintained; considered
communications around
benefits, progress and
partnering efforts
Questions
17
MetLife Asia: significant boost in cross-selling and conversion rate
Project Outcomes
• Develop the strategy, roadmap and execution for the
Center of Excellence (COE) for Advanced Data
Analytics (ADA)
Six fold increase in
cross-selling
• More personalized consumer experience through
advanced data analytics and applying behavioral
economics
27% lift in conversion
rate
• As a result of the project, MetLife was awarded with the
Innovation Award for its Advanced Data Analytics
(ADA) efforts in the Asia Insurance Technology
Awards (AITA) 2015
18% lift in conversion
rate
Mega Trends
What is BE?
BE in Practice
Science to Business
Questions
18
Liberty Mutual: reducing customer churn rate
• The Client wanted to devise a set of behavioral
experiments to increase retention
• PwC created an optimal set of experiments to run in order
to decrease shopping around, increase retention and
loyalty
• Simulation model used to determine the impact that
behavioral experiments would have on customers
• Successful implementation of the behavioral interventions
resulted in $100M in annual saving, due to reduced
churn rate
Mega Trends
What is BE?
BE in Practice
Project Outcomes
$100M Annual
Saving
Science to Business
Questions
19
Liberty Mutual: reducing customer churn rate
Behavioral
experiment
design
Customer
data
analytics
Shopping/switching
simulation
modeling
High-level
roadmap &
implementation
1
2
3
4
Various types of behavioral
experiments targeted
specifically at improving
retention were designed
for testing and
measurement
Available customer data
was rigorously analyzed to
identify pockets of high
attrition and
characteristics of these
pockets
A simulation model was
developed to determine the
potential impact of the shortlisted behavioral experiments
on specific shopper and
switcher segments
Successful interventions
were implemented and
internalized within an
enhanced
Business/Operating
Model
$100M Annual Saving Due to Increased Customers Retention
Mega Trends
What is BE?
BE in Practice
Science to Business
Questions
20
We can apply behavioral interventions to enhance insurance ops
LEARN
IDENTIFY
TEST
ENHANCE
Insurance Lifecycle
Identify untapped
customer needs
Identify up-sell and
cross-sell ways to
better protect
customers
Find new ways of
risk scoring and
rating
Reduce claims
leakage and cost of
claims
Simplify the process
and manage
customers’
expectations
Product Design
Sales
Underwriting
Claims
Servicing
Mega Trends
What is BE?
BE in Practice
Science to Business
Dissuade fraud
and claims
exaggeration
Loss Control
Questions
21
THANK YOU
Stephen O’Hearn
Allan Buitendag
Mehrad Ahari
Global Leader of Insurance
Practice
[email protected]
National Leader of Insurance
Practice
[email protected]
Manager, Insurance
Consulting Practice
[email protected]
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