Consumer’s emotions influence how and why they buy protection insurance

infocusIssue No. 63, February 2014

For many years economists have stressed the importance of insurance as an ‘invisible’ export. For consumers to appreciate the true value of insurance, however, we need to make it a little more ‘visible’ for them.

The key seems to be engaging consumers’ emotions. Without that, we can’t realistically expect them to give up a large part of their hard earned salaries for something which remains, if not outright invisible, then at least intangible.

The science of behavioural economics suggests that decision making is 10% rational, 90% emotional. As an industry, we need to embrace the concept of emotional intelligence, finding new ways to put people in touch with the emotional considerations that matter to them. That way we can help consumers see the value of insurance much more clearly.

Previous reports from The Syndicate have described two key behavioural phenomena that present challenges for UK protection insurers. The first is so-called “imaginary cover”. This exists where people claim to hold cover they do not.

The second, which showed up strongly in our 2013 report, was what is known as the “casino mentality”. One step on from consumers assuming they will already be covered for any issues arising from ill-health or premature death, the casino mentality involves the risk that such issues will never arise, so cover will never be needed!

Examined in the cold light of day, such beliefs fly in the face of the well documented risk we all run of encountering ill-health or death at any stage in our lives. But that is precisely the point: wishful thinking blinds consumers to the value of preparing

Consumer Emotion – Measuring Trust, Value and Loyalty in the Protection Arena

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now for future eventualities.

The Syndicate’s 2014 report takes a closer look at how we can tackle consumer disengagement. Its main themes are: trust, value and benefit, loyalty and communication. In the light of the behavioural attitudes identified in previous reports, it also examines exactly what financial security means to the modern consumer.

We officially launched this year’s report, ‘Consumer Emotion – Measuring Trust, Value and Loyalty in the Protection Arena’, at our third annual Research Forum, held at the National Liberal Club in London on 3 February. In the article that follows we share some of its key findings.

TrustTrust is a scarce commodity these days. In 2013 even once hallowed institutions like the BBC were haemorrhaging trust and goodwill. The perception that our trusted public service broadcaster was implicated in an unseemly cover-up both reflected and contributed to a growing public reluctance to put faith in “establishment” organisations. Five years of economic uncertainty have certainly dented trust in our banks, our financial system, and the politicians we trusted to oversee them. All of which means that trust today is harder than ever to earn.

Contents Consumer Emotion – Measuring Trust, Value and Loyalty in the Protection Arena ................ 1 Stuart Johnson joins HR UK ....................................... 6 HR UK is moving to London ....................................... 6

We hope you enjoy infocus and we welcome your feedback, please forward comments to Kirsteen Grant at uk.marketing@hannover-re.com.

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Earning consumers’ trust is by no means the only challenge facing companies operating in the financial services industry today, but it does have a fundamental role to play in the success and growth of any organisation.

Consumers today are significantly more challenging and harder to please. We have also seen a behavioural shift in how they seek information on products and their ability to find out for themselves about the range and scope of protection policies available. Today’s consumers are more likely to feel confident about their own knowledge or, at least, in their ability to find out what they need to know.

There is a growing range of alternatives to the traditional route of seeking advice from a financial adviser. Technology plays a key role here. With ready access to an increasing array of online propositions, consumers are showing a growing willingness to distance themselves from financial advisers as their primary source of information and advice, see Figure 1.

Our research found that, at 57%, the internet was by far the most popular route to information about life insurance, critical illness insurance and income protection insurance. Second most popular were comparison sites at 40%, with financial advisers the preferred route for one in five consumers.

Figure 1: Where would you go to find information about life insurance, critical illness insurance or income protection?

Source Total

Internet via a computer 57%

Comparison site 40%

Friends and family 25%

Financial adviser 21%

Bank or building society branch 20%

Which? 17%

Money Advice Service (MAS) 15%

Company brochure/leaflet/direct mail (through the door or from a retailer)

7%

Newspaper/magazine 7%

Internet via a mobile device/phone 6%

Other 5%

The report also found that many people share a deeply sceptical view of the financial advice market. The strong suspicion stated

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is that advisers advise on the products that will make them the most money and will not provide a balanced view of what is available across the market as a whole.

Many believed themselves perfectly capable of sourcing the information they needed. One respondent neatly encapsulated a common reluctance to spend money on advisers when alternative methods exist: “Why should I pay someone to tell me how to spend my money?” More encouragingly, however, more than a third saw no reason for not seeking professional advice, a proportion that increases with age.

Insurance – the why and why not?The most important factors in purchase decision making stood out clearly from our research. The top two were “Price” (41%) and “Easy to understand product information” (19%).

When we drilled down into why former policyholders had relinquished cover, there were again two key reasons. The first was a perception that other financial commitments were more of a priority. The second was the previously noted intangibility of insurance.

At the heart of this challenge is the essentially paradoxical nature of the insurance purchase. People buy protection insurance in the hope they will never need to use it! In context this makes perfect sense, of course, but it does significantly compound the difficulties we face in convincing consumers of the value of the cover they hold.

When looking at why respondents had given up on particular products, those who used to hold critical illness were most likely to say they had better things to spend their money on (25%).

Figure 2: What could an insurance provider do to make you stay with them?

Consumers appear to find it hard to get too excited about how, by taking out this product, they had protected themselves against a key financial concern. This shows how intangibility remains a major problem for insurers in the post-purchase phase.

The loose sense of attachment between policyholders and their policies (even after they have bought into the concept enough to make a purchase) works against insurers establishing a trust-based relationship with their customers. We need to show consumers the validity of what we offer to them so that they become tangible: providing cover against everyday risks 24 hours a day.

Loyalty: offered or earned?It is hard to explore the issue of trust without also considering loyalty. Indeed some would suggest that without trust loyalty is almost impossible to win. To learn more about what generates loyalty in a protection products context, we asked: “What could an insurance provider do to make you stay with them?”

As the answers in Figure 2 reveal, the most dominant theme was once again price. Some comments also suggested giving discounts to loyal customers, rather than simply as an incentive to new customers.

There is a danger for the insurance industry that a growing obsession with price could blind consumers to the real value protection insurance offers. If we continue to rely on price for competitive advantage, it only encourages consumers to base their decision on price, rather than consider other value-adding factors.

We asked our survey group which brands they trusted most. The results suggest that trust has less to do with particular products than with the overall experience or relationship consumers have with a brand. It is about a quality of service

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that leads consumers to value their interaction with a brand and hence develop a sense of trust and loyalty.

Values and BenefitsLooking for positives, we asked what people who had bought protection valued about it. Many respondents indicated that they valued the fact that by holding cover they were providing protection for their families along with ‘peace of mind’ and ‘security’. Encouragingly, this indicates that taking out protection insurance does indeed cater for important emotional needs.

Many saw Critical illness as a valued cover, because it was a living benefit. This helped convince them they had made a prudent product choice and led them to value the benefits their cover provided. Conversely those who had not renewed cover did so because they did not believe strongly in the value their products provided and felt they had better things to spend their money on.

The challenge for our industry is getting policyholders to appreciate the value of a product bought to cover a potential risk, compared with spending the same money on something which might bring immediate gratification but will not contribute to future peace of mind.

One major finding with significant relevance to insurers is the difficulty consumers have in estimating the price of insurance. When we asked our survey group to speculate on the monthly cost of a range of protection products, most estimates were significantly higher than the actual cost.

Younger respondents (those aged 18 to 24) had particular difficulty arriving at a figure close to reality, believing on average that life cover would cost £105 a month. In reality, the market average premium for £150,000 of life cover over 25 years for someone in this age group would be under £10 a month. However, these figures could have been made in context to the world this generation lives in, so it is not too surprising when you compare this to motor insurance and mobile phone charges.

These figures highlight the challenges our industry must overcome to reach potential future consumers. While it is difficult to draw definitive conclusions from an overall mean figure, our feeling was that people significantly overestimate premium costs, as Figure 3 suggests.

Figure 3: How much per month do you think it would cost for life insurance, critical illness or income protection?

Overall Mean

A life insurance policy providing a lump sum of £150,000 on death

£66.00

A critical illness policy providing a lump sum of £70,000 on diagnosis of a serious illness

£60.00

An income protection policy providing a monthly income of £500 per month following an injury or long term sickness

£49.00

We decided to test needs in greater detail and contrast this with perceptions of value. Would people express a preference or value the products they already held if we provided a description that emphasised the benefits they offered?

We looked specifically at those who already held protection products, finding that those holding income protection were the most likely to select their own product as providing best value. Those holding critical illness were least likely to select their own product from the list.

These results support previous years’ findings demonstrating that holders of income protection had the most comprehensive understanding of their product, despite it being arguably one of the more complex products available. This suggests that the level of engagement required during the application process increases consumer awareness and hence confidence in the products bought.

Financial SecurityThis year’s research focuses extensively on the issues of trust, value and loyalty. We have been able to learn more about what financial security means to consumers and how they manage their priorities. When we asked ‘If you could take out an insurance policy, what would you want the most?’, more than half opted for a plan that would provide a significant lump sum if they died, underlining the role of family as the key driver for purchase. This was closely followed by a lump-sum pay-out if diagnosed with a serious illness.

Looking at how respondents’ finances would be affected by illness, we asked how much they thought they would need in savings if they were unable to work for three months due to injury or illness.

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The mean answer was £3,753. This concurs with our Spring research, where the mean estimated requirement per month was £1,322.12 (£3,966.36 over three months). Twenty two percent of 35-44 year olds had no savings. Many might consider themselves “safe” for a few months should the worst happen and would therefore discount the value of insurance or see it as unnecessary. Very few seem to make a comparison between a monthly premium for protection insurance and the belt tightening required to put aside sufficient savings. The latter approach also assumes, of course, that these rainy day savings remain untouched rather than playing the dual role so often required of them, as discussed in our previous research.

These findings underline the importance consumers place on savings as a way of meeting one of our highest priorities: protecting our families. It is clear we need to make the benefits of insurance more tangible. Savings have the edge here, verifiably present in a bank or building society account (or under a mattress perhaps), savings seem more real. For that reason they are more likely to stay front of mind.

This may help explain why ISAs and bank accounts featured more regularly than protection insurance among the financial products respondents said they valued most. One thing that emerges clearly from the research is that consumers are anything but clear about insurance and its value to them.

It’s good to talkCommunication has been a consistent theme running through recent Syndicate research. It underpins a number of this year’s areas of inquiry including:

• where people go to find information on protection insurance

• the brands that people trust (and the messages they communicate and how they do so)

• the factors that matter to those considering buying our products (e.g. simplicity of the communication)

Our question on trusted brands this year strongly indicated that people are more likely to trust brands they frequently interact with. In view of this, we tried to establish whether policyholders had been contacted in the last two years by their provider. At least 70% of people had had no contact, or could not recall any contact within the last two years.

Among those who answered yes, the most common reasons for contact were either a review of cover (e.g. annual review) or what respondents termed a sales call. The language used in free text answers was generally neutral or occasionally cynical, suggesting that most were unlikely to recall the contact as a positive experience.

This suggests that buying insurance is currently perceived more as a transaction than as the beginning of a relationship. There has been an ongoing industry debate about who owns the customer in instances where they do not go direct to a provider. This may help explain the lack of contact and communication. Increased and more frequent communication can foster trust and build productive relationships. As an industry, we should not miss out on these opportunities.

Protection insurance – an industry apart?The overall conclusion from this research is that, despite the vital importance of the products we offer, the protection industry is seen as an industry apart and does not enjoy anything like the intimate customer relationships other industries do. Is this because the insurance industry is genuinely different? Or have we made ourselves different and simply need to find new ways of creating a greater emotional connection with our customer base?

Kirsteen GrantMarketing & Communications Manager

Source: The Syndicate Report 2014 Online omnibus research was conducted by ICM from

28-30 September 2013. 2,033 respondents who were GB adults aged 18+. In order to achieve a representative sample, data was weighted to the data found in the National Readership Survey conducted with 34,000 adults.

www.hannoverlifere.co.uk

Hannover Re UK Life Branch welcomes Stuart onboard, he brings with him a vast knowledge and wealth of experience in the UK and Irish protection markets both within direct offices and reassurers. Stuart will play a critical role in developing the strategic direction of HR UK and liaise regularly with other members of the Hannover Re Group.

Stuart’s new role involves shaping and guiding the development and delivery of our underwriting and claims strategy and philosophy. In addition he will ensure that the quality and performance of our underwriting, claims and medical research functions continue to deliver innovative solutions that meet the high standards expected from our clients.

Stuart will also play a key part in our client facing team, where he will provide dynamic dialogue with our clients sharing knowledge and insight across the spectrum of underwriting

and claims along with maintaining close relationships to keep clients ahead of the curve.

Stuart JohnsonGeneral Manager,Underwriting & Claimsstuart.johnson@hannover-re.com

Contact uk.marketing@hannover-re.com

We are very excited to be moving to our new home at 10 Fenchurch Street in the heart of the City of London at the beginning of March 2014.

After more than two decades in Surrey, our new offices provide a perfect central location to better serve our clients.

The newly refurbished office provides high quality client space offering further opportunities for collaborative working.

Our new contact details from 3rd March 2014 will be:

Hannover Re UK Life Branch10 Fenchurch Street, London EC3M 3BETel: +44 (0)20 3206 1700 · Fax: +44 (0)20 3206 1701

Hannover Re UK Life Branch is moving to new offices in the heart of the City

Stuart Johnson joins HR UK as new General Manager, Underwriting & Claims

Positioning ourselves in one of the largest cities in the world