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How one insurance carrier uses behavioral economics to improve customer service – Interview with Dan Ariely

The traditional insurance business model has a weak spot: it tends to generate resentful customers. Bureaucratic claims processes, long delays and fine-print legalese can conspire to frustrate policy holders at the precise time when they are feeling most vulnerable.

Dan Ariely — a distinguished professor of psychology and behavioral economics at Duke University, two-time New York Times best-selling author and the chief behavioral officer at Lemonade, Inc. (a pioneering P2P insurance carrier) — shared his insights on how today’s businesses, particularly insurers, can use behavioral economics to improve customer service in order to forge long-lasting relationships built on loyalty and trust.

Q: Your research into behavioral economics suggests that customer experience may affect behavior in seemingly irrational ways. In your book, Predictably Irrational, you drive home the point that such behavior is nonetheless largely predictable. Can you expand on that?

Dan Ariely: There are two types of irrational behaviors. There are irrational behaviors that are kind of irrational and negative (like texting and driving, not exercising) and there are rational behaviors that are irrational from the economic perspective, but [desirable, like tipping restaurant servers]. There are many of those rational but good behaviors.

For example, when people taste wine and they expect that wine to be fantastic and because of their expectations of it to be fantastic, it actually becomes better. It is irrational. It is not part of the standard framework, it is not an objective experience of the wine. But nevertheless, the fact that our expectations can play a role in the way we experience the world is a wonderful, wonderful thing. I would not want to give it up. And there are many other examples like this.

Q: How can a business take predictable irrationality into account when designing the customer experience?

DA: Often, what we recommend that businesses do is to start with something called the behavioral diagnostic process.

The behavioral diagnostic process is a process by which [we] first look at what the barriers are for good behavior—what are people not doing well? What is right now stopping people from behaving better? The second part is to say: what are the motivations we can build into it? You can think of this as a version of gamification.

If we take retirement savings as an example — someone is joining their work on the first day and they have a retirement savings account. They have an incentive to put money into it, but procrastination, complexity of the decision, and the fear of making mistakes are basically slowing people down. You can ask in the behavioral diagnosis part, “How do we reduce those barriers? How do we help people figure out what is acceptable and what is the right decision and set it up for them?”

After that you can say, ‘Can we add extra motivation? Can we make them feel pride? Can we make them feel joy? Can we give them excitement? What else can we put in?’ and so on.

I think one of the big lessons from social science in general is that small details matter. Often, when we design products or services, we think about the big picture, but we need to focus on the small picture. We need to think about the details.

Q: Your findings have profound implications for a large number of industries, one of them being insurance. How would you use behavioral economics to align the interests of the insurer and the insured?

DA: I think the main point is trust. If you have a relationship where both parties feel that the other party is going to cheat them, they are both going to try and cheat first. There are all kinds of experiments on this, but the point is, when you go into a relationship suspecting that something is going to go wrong, this is a really terrible recipe for starting a [partnership]. So now the question is, “How do we create trust?”

There are lots of ways of doing it. One of them is to eliminate or reduce conflicts of interest. One of them is to be explicit about the procedure — transparency. Another one is to get people to think about the long term, to say, “We are here for the long term together.”

Often, for insurance companies, it is very hard to eliminate conflicts of interest, but being clear about the procedures, being transparent and telling people that they are there for the long term are usually easy steps.

Q: How would you characterize the impact of insurance companies’ bureaucratic claims processes on customer retention and honesty?

DA: I think that there is no question that bureaucracy in the insurance process comes at possibly the worst time in people’s lives. It comes when people have just experienced a loss; and now they have to start fighting with claims and delays. Time is often of the essence for consumers and there is that tremendous feeling of helplessness.

Q: How can it be done differently?

DA: If it was me, I would think very differently about those things. Yes, people might be dishonest from time to time. Yes, claims might be exaggerated from time to time. But the question is, how do you deal with it? What is the right way?

For example, should you just say something like, “Nobody ever cheats more than 50 percent, or almost never. Let’s just approve 50 percent of the claim or 70 percent”? Let’s understand that people are under an emotional stress. Let’s make the first part of the process incredibly easy and comfortable for people so the [claims process] doesn’t create this feeling of hatred.

And on top of that, feeling that somebody is in control of our lives is incredibly depressing. And I don’t mean just a depressing thought — it has been actually [proven that the] reduction of control over our life changes the immune system.

People try to do all kinds of things to gain control, including taking revenge. Taking revenge against somebody, providing negative word of mouth, all of those things are often an outcome of feeling out of control and it is a way to take control over a situation.

Q: Your company, Lemonade, is a P2P (peer-to-peer) insurance carrier. Can you explain the model’s benefits?

DA: If you go to the market and somebody is selling something for a $100 and you say, “$90” and they say “OK,” you [might feel like] you should have offered $60. With insurance, I think it’s like that. Even if you end up with something in the end, you never feel good about standard insurance.

I think P2P could provide both a higher peace of mind to start with. I think it could reduce some of the costs that are connected to fraud and dishonesty and exaggeration and also, after claims it could get people to feel better about it and not to keep on asking themselves what is going on and if they were cheated.

I have some friends who had insurance claims that were basically paid, but they still don’t feel good about it, because they keep on asking themselves, “Did the insurance company cheat us and by how much?”

I think that these three periods — before you have a claim, during a claim [resolution] and after the claim — could be better.

Q: Can you make do without brokers in an insurance model built on the paradigm of a social network, or does everyone become an insurance broker?

DA: I don’t think people are able to make the right decisions for this themselves about what insurance to get. Maybe some simple insurance like renters’ insurance, but everything else, even car insurance, I need to understand what kind of insurance I should get, how much coverage and liability. And these are not simple decisions. So we need some help. Does it have to be a broker? Absolutely not, but do we need help in figuring out what’s the right decision for us? Of course, the answer is yes.

More tips: 

Here are a few quick tips on how a business can think from the customer’s point of view in order to create a delightful customer experience:

  • Start with the behavioral diagnostic process: find out what is stopping the consumer from taking action and figure out how to reduce these barriers
  • Reduce the complexity of decision making to minimize procrastination: figure out an acceptable decision and offer it to the customer for quick approval; give the customer a feeling of control
  • Use gamification: when designing user experience, build additional motivation into the product or service
  • Small details matter: when designing products or services, focus on the small picture and think about every detail
  • Build trust: be clear about procedures; be transparent
  • Understand the social context: use peer pressure to try to create social norms around your product or service
  • Forge customer loyalty: think of the customer experience with a view on the long-term relationship

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