Behavioral Insights in Insurance

This briefing note analyzes insurance purchase and use decisions through concepts of behavioral economics. The note argues that the uses of these concepts along with thorough understanding of business dynamics can alone lead to effective user centric designs in insurance and microinsurance. It seeks to explain the rationale of consumer behavior and delineate some probable behavioral triggers for deciding to purchase insurance products among low-income households. The note covers the following sections in detail:

• Conventional ideas of insurance demand determination with a focus on the expected utility and optimum deductible approach;
• Anomalies of insurance demand in the real world;
• Behavioral factors and biases that govern insurance purchase decisions of individuals including loss aversion, mental accounting, and status quo bias;
• Common goals in insurance purchase decisions with a focus on satisfying requirements, investing through insurance, emotion related goals, and satisfying social or cognitive norms;
• Behavioral biases of insurance suppliers with a focus on recency and availability bias.