Recent media releases by Australian Securities and Investments Commission (ASIC) relating to Add-On* insurance and life insurance highlight that customers do not understand the cover they have purchased.
Background
Generally, an Australian Financial Services license is required to run a financial services business in Australia. The Corporations Act 2001 (the Act) imposes a single licensing regime for financial products (including insurance) that creates obligations upon the financial services provider in respect of providing information to consumers during the sales process. Insurers have designed their sales processes to comply with these legal obligations rather than ensuring the customer understands the cover they are purchasing and that the cover will meet their needs.
One of the most important documents is the Product Disclosure Statement (PDS). The PDS is a document, that contains information about the product including any significant benefits and risks, the cost of the product and the fees and charges that the product issuer may receive. In some instances, an insurance PDS can be in excess of 100 pages. The Act sets out the purpose of a Product Disclosure Statement providing information
‘…as a person would reasonably require for the purpose of making a decision, as a retail client, whether to acquire the financial product.’
It is clear that insurers need to provide information to the customer for the purposes of decision making. A simple principle, however, the industry has over the years struggled with how they achieve this.
The Insurance Council of Australia (ICA) in recognizing this problem set up the Insurance Disclosure taskforce (disclosure taskforce) who reported their findings in October 2015. The taskforce observed that
‘Many initiatives (by legislation, regulators, the insurers themselves, as well as industry bodies) have been adopted over many years to better inform Australian customers and aid the education process to enable better decision-making about the purchase of general insurance.'
Process v behavior
The disclosure taskforce highlighted the failure of the disclosure regime as an inherent design flaw.
'…efforts have largely focused on legal and compliance imperatives to provide accurate information which was, in some sense, clear. The behavioral science contribution to the work of this Taskforce has significantly refocused attention on communication outcomes, rather than simple well-meaning legal tests.’
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The ICA is looking to once again address the issue through the 2017/18 review of the General Insurance Code of Practice. In their interim report, the ICA has recommended ‘the Code should provide guidance on best practice disclosure principles’ (Proposal 2).
The interim review provides a great opportunity to reimagine disclosure from a customer lens. The perspective shifts from legal disclosure to customer comprehension.
What happens if we do nothing?
Driven by the consequences of non-compliance, insurers, and technology providers are designing systems that are enabling the insurer to comply with its legal obligations. Online distribution websites as a result usually include a statement similar to the following:
By getting a quote you agree that the right PDS is being made available to you by this website and agree to our Online Terms & Privacy Statement.
The insurer has discharged its legal obligation however in doing so they have inadvertently created potential issues for the customer. In my discussion with consumer advocate groups, the issue that creates most customer confusion is ‘wear and tear’. Customers when buying home building insurance consider they are covered for damage to their home. They are surprised at claim time when they learn about the ‘wear and tear’ exclusion. Often, they then take to social media to air their grievance.
It is common knowledge that the majority of customers do not read disclosure documents. Notwithstanding this knowledge, we continue to adopt the traditional approach of providing lengthy documents without validating customers comprehension. Misleading and deceptive conduct to one side, it is not difficult to imagine a scenario in the not too distant future where a court determines this conduct is no longer acceptable based upon concepts of good faith, honesty, and fairness.
It’s time to make the shift from process to behavior. Insurers need to start from a position of ensuring that the customer understands the cover they are buying and the consequences of policy exclusions and limitations. Once the threshold of comprehension is achieved, the insurer can provide disclosure documents to satisfy legal obligations.
What does a behaviorally based disclosure approach look like?
Consumer advocacy groups and the disclosure taskforce have similar views on what an innovative disclosure environment may look like fostering customer comprehension. Recommendations have included:
- Plain English wordings
- Worked examples of specific clauses that cause customer ‘pain points’ to demonstrate how the clause operates in practice.
- Filter and ‘quick test’ questions to gauge the level of customer comprehension.
- Use of animation and infographics to explain complex concepts.
- Specific attention to areas of potential customer vulnerability such as mental health exclusions.
- Customer testing of disclosure mechanisms before they ‘go live’.
- The use of technology particularly machine learning and chatbots as an enabler for customer comprehension.
- Industry-based campaigns such as the ICA’s ‘Understand Insurance’ website to facilitate understanding and comprehension.
The need to educate customers
In the digital world, a measure of success often includes speed of purchase. This needs to be challenged in the context of financial services.
Consider the time and consideration adopted in the consumer decision-making process in purchasing a home, a car or a holiday. Yet through technology, we are driving a customer behavior that encourages a 2-3-minute purchase decision for a product designed to protect these valuable assets. That doesn’t make sense and can hardly be in the best interests of the customer.
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We need to educate customers that spending 10-15 minutes of their time to understand the insurance product they are purchasing is a good investment of their time. We then need to ensure that the process to assist the customer to understand what they are buying is made simple. It is our role to make a complex 100-page PDS simple for customers to understand.
Technology as an enabler
Technology will be an enabler provided the focus shifts from the speed of transaction to consumer education and comprehension. Together with behavioral science, and through a combination of video animation, machine learning, and chatbots, consumers can be lead through the sales process in an engaging manner designed to educate and match the right insurance product to their needs. Automated testing tools incorporated throughout the sales process will provide instant feedback to the consumer in addition to evidence for the insurer for audit purposes.
Time for action
Disclosure has been an area of customer dissatisfaction for far too long. The industry is embracing technology to drive efficiencies and cost savings and to enhance the customer experience. We need to stop thinking about disclosure in terms of compliance with legal obligations. Instead, we need to grasp the opportunity to ensure customers fully understand that the product they intend to purchase will meet their needs and expectations.
A genuine customer-centric approach requires looking at the problem not from our perspective, but the customers. The issue is not one of disclosure, it’s one of comprehension. It is time to remove the thorn from our side.
* Add-on insurance policies, such as Motor Equity (also known as GAP), Tyre & Rim, Consumer Credit Insurance and Warranty, can be offered to consumers when purchasing a new or used car from a motor dealership.