If you’ve ever wondered why, precisely, a client won’t get insurance when they should, or why they procrastinate, even when they’ve mostly made the decision to buy, a closer look at the psychology behind a client’s decision-making processes may yield some interesting clues. 

There are a few notable roadblocks that every advisor must get past at some point: People don’t want to talk about their own death and often don’t have a line in their budget for premium payments. Often though, what life insurance advisors are working against are not rational thought processes, but hardwired and unconscious cognitive biases and heuristics which help clients make decisions when information is too complex to process at a glance.

• Mental shortcuts 

“People make decisions in life using mental shortcuts. Heuristic simply means shortcut,” says Newristics founder and president, Guarav Kapoor. “Over time people accumulate lots of different kinds of mental shortcuts to make decisions they face in everyday life. A bias is also a mental shortcut. If you’ve already formed a bias towards or against something, it helps you get things done quickly because you’re already decided. These mental shortcuts, many times lead to good decisions, but there are many other times where they lead to suboptimal, outright wrong or irrational decisions, as well.” 

Kapoor’s firm focuses on understanding which heuristics clients are using (the company has a database of more than 650 of these mental shortcuts) to help companies craft messaging and communications which either “fight or feed” the heuristics at work when clients are making the decision to buy or not.

• Behavioural economics 

At the insurance company level, Matthew Lawrence, senior director, financial services consulting, PwC Canada says companies are beginning to make use of behavioural economics principles to improve and simplify sales presentations and the application process, as well.

“I think organizations are really trying to understand how they can leverage some of these principles more broadly within their organization, and in a number of different areas to drive a more client-centric organization,” he adds. “One of the ways they’re doing that is by thinking about how you use things like behavioural economics to create a different kind of structure.” 

To help advisors who are interested in learning more about the psychology behind the insurance buying process Kapoor, along with Lawrence and PwC Canada’s senior director and behavioural economics leader, Melaina Vinski identified a number of heuristics or cognitive biases that are often at work when clients are making the decision to buy insurance, or not.

• Loss aversion 

Across the board, loss aversion is one of the first biases that come to mind when experts are asked to consider the insurance-buying process. In short, they say humans are quite adverse to losing what they have – so much so that they are not willing to give up what they have, even if they were to get something better in exchange.

“The pain of losing is greater than the pleasure of gaining something better than what they have currently,” says Kapoor. “It sounds awkward or counterintuitive, and people will rarely even admit to it, but in real life, when you follow their decisions, lots of people, their behaviour will show you that they’re holding on. In the process of reaching for something new, you could lose some or part of what you have. Suddenly you become very nervous.”

Loss aversion is most likely to show up in the process when the time comes to consider family budgets and premium payments.

“When presented with an opportunity to buy an item that is not budgeted, the only way to acquire it is to give up something that is budgeted. Giving up something budgeted gets evaluated as a loss,” say the authors of LIMRA’s strategic issues series paper, Using Behavioral Economics to Sell. “People will gamble that they will not need insurance to avoid the certain loss” they will experience when parting with their premium payments.

• Ambiguity aversion 

The problem of loss aversion is further exacerbated by the fact that insurance is an intangible product. If a client is at all unsure about what happens next after they sign their application, they may not go ahead with the sale at all.

Vinski says clients will often take comfort in knowing what comes next after they’ve made their initial decision to buy: “There needs to be an incredible amount of support and transparency about what will come after they click the submit button,” she says. “It actually gets people to follow through with their intention to purchase. We see massive drop off rates at that critical juncture. We think it’s primarily due to ambiguity aversion.” 

To help clients get past this particular roadblock, insurance industry coach and speaker, Jim Ruta says a lot of top advisors will bring their own insurance policies to client meetings, to show them what a policy actually looks like. “Have you ever seen a million dollar policy?” he asks. “This is an intangible sales business. You’re selling an intangible. But when I bring you a policy I’m making it a little more tangible. It’s more tangible than it would be otherwise.” 

Ambiguity aversion will also manifest itself when clients are presented with choices – clients will gravitate to the choice that they know the most about, whether or not that choice makes sense for their circumstances.

“They tend to avoid choices where there are some unknowns, even if those unknowns are very easy to understand,” says Kapoor. “When people have choices in front of them, they tend to lean towards the choice they know more about, even if it’s not the best choice for them.” 

To help further dispel any ambiguity, Vinski strongly recommends that advisors dispense with jargon whenever possible.

“There’s a whole host of research that suggests technical jargon, the overuse of technical jargon not only influences the perceived expertise of that advisor and the trust of that institution, but also impacts the likelihood that a customer will actually seek advice from that advisor when they need actual help,” she says. “They’re less likely to seek advice. It also erodes trust and perceived expertise of the person providing the advice.” 

• Overload bias 

Science has also shown that too much information can trip a circuit in a person’s mind, causing them to shut down the decision making process altogether. Often the prospect will procrastinate, or won’t come back to the product at all because doing nothing is easier than analyzing the alternatives. 

“The way the industry has been structured and set up today is very product centric,” says Lawrence. “For the average customer I think there is a lot of complexity. When people are actually presented with too much information, too much complex information, they tend to get overloaded and shut down and would prefer not to make a decision (at all).” 

LIMRA researchers recommend that agents give clients a simple way to decide about their options: “Financial products are difficult to understand and prospects stress over making the wrong decision. Give them a simple way to decide and make recommendations about what they should do,” they write.

• Disappointment aversion  

Does your client have misgivings about insurance companies in general? Much like it sounds, if a client imagines that they might in some way be disappointed by the outcome of their decisions, they will postpone or not proceed at all.

• Future discounting  

Future discounting is the tendency to outweigh the rewards we receive today, and discount the impact of our decisions on our future selves.

• Over confidence, optimism bias 

Overconfidence in investing leads clients to believe that their results will be better in the future than they have been in the past, or that their results will be better than the next person’s results – whether they have a good reason to be optimistic about the outcome or not.

In insurance, people are generally overly optimistic about their own vulnerability, their own longevity or about how things will turn out when they die.

“People tend to think more optimistically than data or history suggests they should,” Kapoor says. “When thinking about the future versus the past, they think the future will be more positive than the past has been for them even if they have no rational reason to believe that. They don’t have a good answer for it, but they think things will be a lot better.” 

• Reaching clients at the subconscious level 

To get past these biases the experts we interviewed recommend keeping processes and communications as simple as possible. Although there is only so much advisors can control about the application and underwriting processes – changes to these processes will be driven by insurers, “I think what’s important is that the advisor simplify the process as much as they can,” Lawrence says.

Furthermore, they recommend working on the language used in sales presentations – work wherever possible to connect with clients at a more subconscious level by tailoring stories and communications that speak to these unconscious biases.

“Literally all of your communications should be driven by heuristics and biases. These are essentially one level above the product level communications you need to make,” Kapoor says. “You have an insurance policy which has specific features and benefits. That you have to communicate, but keep in mind that the human being who’s absorbing this information is also driven by accountability bias (the tendency to make decisions based on how well that decision can be justified to those around us), is also driven by ambiguity aversion, is also driven by loss aversion or disappointment aversion. Find a way to speak to those things somewhere in your messaging.”