We are living in the digital revolution, insurers are fully aware of it. They are launching initiatives to integrate the movement. They are largely based on technological innovations (enhancement of Data, services available in multi-device through the customer area, etc.). However, digital cannot be understood only on these technological aspects. Innovation can also come from more “abstract” fields such as the social sciences.
Stemming from the most recent work in behavioral economics, Nudge theory should be of great interest to insurers.
The heart of behavioral economics work is to consider that human psychology does not have the rationality classically described by economic theory: homo œconomicus. We don't spend our time calculating and optimizing each of our decisions. This questioning is based on the functioning of the brain. According to his work, the brain is like a motor with two modes, each with specific characteristics.
It is in this scientific context that the theory of nudges was formalized by Cass Sunstein and Richard Taller ( Nobel Prize in Economics 2017 ) in 2008 in the book - Nudge: the soft method to inspire the right decision.
Nudges are both methods and tools aimed at "structuring the architecture of choice for change so predictable the behavior of people without prohibiting any options or significantly changing the financial incentives.
Three principles govern the use of nudges:
1. Orientates the choice "by default", but the individual remains free;
2. Easy to set up and inexpensive to make;
3. Depend on experimentation and trial.
However, nudges are not a substitute for communication. They do not seek to persuade, but to act. The philosophy of marketing is to accommodate all the knowledge to satisfy the customer. Nudges go beyond this logic since it is considered that individuals already have all the necessary information, but they do not necessarily process it correctly.
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Another example of the use of nudges is the “ Save More Tomorrow ” program which aims to increase the savings of Americans. In the context of the American retirement system, by private contribution, individuals tend not to save enough for their retirement. The “Save More Tomorrow” program has implemented various nudges to guide the decisions of individuals and make them save more. This program is based on two axes:
1. People attend to favor the standing quo. The nudge to set up is therefore to choose the default option. Under the program, employees were affiliated to a savings program by default, and they were free to leave it.
2. People have an aversion to losing. It is harder to lose something than not to gain it. By playing on this bias, the program sets up a second nudge which aims to automatically index the increase in payments on the retirement plan, to salary increases.
This program has been a success, allowing beneficiaries to save more for their retirement.
There are four key criteria for evaluating the usefulness of setting up a Nudge:
- There is a need to change behavior;
- This is a strategic subject for the organization;
- Traditional methods have shown their boundaries;
- There is mutual benefit for the company and the consumers.
In recent years, governments have set up "team nudges" which aim to use nudges to improve the application of public policies. In the United States: Social and Behavioral Science Team; in England: Behavioral Insights Team; in France: Service for the Modernization of Public Action.
Digital is characterized above all by new technologies (IoT, Big Data, etc.), new project construction methodologies, new Business Models (multi-service application platform, etc.). Each of these innovations has tremendous potential, but the promises are not always fully delivered. The use cases can be concentrated on a single technology, the levers allowing the valorization of these innovations are not always found. Nudges can play an incentive role by linking and enhancing the possibilities offered by new technologies.
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Big Data makes it possible to process a large amount of information and bring out trends. Beyond the treatment, it is sometimes difficult to know that one is looking for and/or to use what one has found. Nudges are interesting case studies. It would be possible with Big Data to determine groups with similar behaviors, to understand their determinants, and thus provide material for making nudges and evaluating them.
Nudges are based on experimental and iterative processes. It is necessary to test different messages, to repeat the tests while making them evolve. Today, with methodologies such as A / B testing (different messages are tested at the same time) or Agile development, it is possible to have sufficient adjustability and responsiveness of its development teams to keep up with the expected pace. by a nudge cell and while having controlled costs.
Finally, the ultra connection of customers via smartphones gives the possibility of a constant connection. This allows information about individuals to be collected (with their consent). They are necessary for understanding behavior, identifying and improving nudges. Smartphones are also the means of creating incentives, for example through push notifications.
From now on, it is possible to imagine applications of nudges for insurers.
For certain American automobile insurances, the declaration of mileage achieved in the year (n) conditions the premium for the following year (n + 1). The average rate of under-declaration is estimated at 15% compared to the km traveled. A Nudge has been tested in an attempt to improve returns. Instead of signing the declaration on honor at the end of the document, the researchers put it on the document header, that is, before the declaration. This simple change results in an increase of 10% in the number of km declared, or again for the insurer of $ 48 per insured. The simple reorganization of the structure of the document, of the architecture of choice, makes it possible to modify the behavior of the insured and therefore to increase income.
In the field of health prevention too, nudges can, in the short term, be a solution to increase client engagement in prevention programs, and reduce the moral hazard inherent in this type of program. The aim is to ensure that policyholders follow the prescribed measures.
In the long term, the implementation of nudges could participate in the complete transformation of the insurance business. The insurer's job today is to cover risk by defining a premium. The orientation of the approach is mainly financial.
The business could evolve more towards a logic of risk reduction. This transformation is emerging in the auto insurance market, via IoT and automation. The material risk is going to be reduced significantly. Despite these developments, humans would remain a risk factor, because their behavior is not always rational. To try to reduce these risks, insurers could integrate the logic of nudges at the heart of their strategy.
Are nudges a new world to discover? Advances in behavioral economics, improved technologies, the implementation of daring strategies, are all ingredients that will make nudges successful tomorrow. Behavioral techniques are undeniably a science and a valuable tool to be used in the service of the major transformation that the players in Insurance have started. Nevertheless, questions and limits remain. The main question is on the ability of nudges to permanently affect behavior.
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