Life - Articles - Life insurance protection gap is auto enrolment the answer

When addressing how to close the life insurance protection gap, could people simply need a nudge in the right direction? A quick look at similar efforts to address take up of organ donation, which also faces challenges, could hold the beginnings of a solution. Studies show that humans in many cases are conditioned to choose the path of least resistance, and are inclined to follow the norm. Governments have sought to increase organ donation through making it the “new normal”. This concept could prove relevant to the life protection insurance industry.

 By Melanie Puri, Actuarial Director at PwC UK and Ewen Tweedie, Actuarial Manager at PwC UK

 Why don’t people buy life insurance?
 We recently conducted a survey of 1000 nationally representative adults, to better understand the public’s attitude towards life insurance. One of the most striking things we found was that 50% of respondents had never bought life insurance. This includes 21% of people who had considered buying life insurance in the past, but hadn’t taken it out, and a further 29% had never considered buying it.
 That encouraged us to understand better what the main barriers are to buying life insurance and what can be done to help the public to overcome those barriers.

 Cost, or rather the perception of cost, emerged as one of the main reasons why people decided not to buy life insurance. The respondents over-estimated the cost of buying life insurance significantly, thinking that £100,000 of life cover might cost on average £40 per month, instead of the c£10 per month cost that might be closer to reality. A lack of financial understanding also puts consumers off. This underscores a desperate need for providers to create solutions that are intuitive, particularly for the younger end of the spectrum for those aged 18-34.

 Whilst intuitive products would increase awareness of insurance in general, life insurance remains a difficult subject to discuss at the dinner table. We think more direct action could help to break this taboo, improving the financial resilience of the 16 million households without life protection insurance in the UK today.

 So what might be the answer? If the Nudge Theory mentioned above were put into practical action, one answer might be to include life insurance benefits inside the auto-enrolment model that has been so successful in helping more people save for their pension.

 From our survey, we know that two thirds of the population would opt to stay in an arrangement where life insurance was automatically offered. As with pensions, there could still be a choice to opt-out, but the majority wouldn’t opt out - and in one stroke, the financial security of so many families would be improved. This is not a new idea - other countries already have something similar - so why not in the UK too?

 Encouraging people to get covered: what else might help?
 We know from our survey that the internet is often the first place many turn if they are thinking of buying life insurance. But we also know from speaking to insurers that only maybe three in every 100 people who start the process of purchasing life insurance online actually buy.

 We think psychology is at play here and could at least partly be overcome by effective use of technology. Anchoring - where an individual depends too heavily on an initial piece of information when making decisions - is a key influence. On a day-to-day basis, many would spend £10 without thinking too much about it - a couple of drinks in the pub, a bit of shopping on the way home from work barely registers. However, when considering whether to spend £10 per month buying life insurance, purchasers often concentrate on the larger number - the £100,000 of cover and whether that is the exactly right amount of cover to take - rather than the £10 per month purchase cost that they are buying into. By getting hung up on that question, they fail to purchase at all, leaving them financially vulnerable.

 The long term description of the products also puts consumers off - they feel like they are signing up for 25 years of premium payments with no way out if their circumstances change. In reality, for most people cover can commence immediately, and can be simply cancelled at any point without penalty. This makes the decision to take life insurance less onerous than a 12 month mobile phone contract, or a TV subscription, but this is not clear and obvious to consumers.

 Is technology the answer? If during that online purchase, some real time and real-person online help were available, could that increase the take-up rates? And by help we don’t mean ‘advice’. Advice is a loaded concept in the financial services space, it comes with many connotations of salesmen, paperwork and commission. We just mean help - it might be help in understanding some terminology, help in understanding the process and what happens next - enough help to push the person through to the conclusion of actually purchasing the insurance.

 We know there are Insurtechs operating in this space, but the large established insurers came out as a clear favourite as the ‘provider of choice’ in our survey. So it is they who have the most to gain by taking action now - and most to lose if they stand still.

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