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Taking the mystery out of buying insurance

At first glance the Insurance Council of Australia’s (ICA) new report into consumers’ insurance-buying habits and misuse of product disclosure statements is merely a restatement of the bleeding obvious.

It’s hardly news that consumers overwhelmingly buy on price, don’t study the details and all too often don’t know exactly what they should be insured against.

Many of these points were made to this writer in 2005 by the then parliamentary secretary to the treasurer, Chris Pearce. Twelve years ago he was concerned that the documents he had received with his personal insurance policies were acting as a doorstop in his office.

As has pointed out before, product disclosure statements (PDS) were originally envisaged as documents that would state the details of the policy simply and clearly, to ensure they were fit for the consumer’s purpose.

But they also had to protect the insurers’ interests, and the PDS emerged as a ponderous tome crammed with lengthy legalities, explanations and cautions. Clarity died, and with it the ability – or inclination – of customers to understand what they were buying.

So it’s satisfying to see the industry taking up the cudgels again to better understand and communicate the mindset of the average insurance-buyer. 

The main points uncovered by ICA are:

  • Consumers focus most on price rather than policy detail;
  • Most believe they have all of the details when buying, even though they don’t consider policy exclusions and limits;
  • Policy renewal letters are the most trusted and commonly used document;
  • While 88% are confident they understand the policy details, their understanding of policy exclusions and limits are poor;
  • Many don’t consider the specific risks they need to cover; and
  • A consumer who has previously made claims is typically better informed and more likely to read the PDS.

Of course, understanding the problem is one thing, doing something to solve it quite another. And it’s here that progress is obvious. The insurance industry of 2017 is far more focused on solutions than it was when the PDS was devised in the earliest years of the century.

The report acknowledges the insurers’ efforts to provide alternative information sources for consumers – tools the consumer might even use – and agrees that “maintaining a predominant focus on the PDS will continue to result in missed opportunities to engage consumers”.

And as every policy is subtly different, the report says the task of coming up with innovative new ways of being clear, concise and informative should be left up to the individual insurers. Previous generic programs not having succeeded, the marketing experts might just be able to come up with innovative new approaches.

And the effort might also give the industry something new to spruik with its advertising dollars, rather than making low prices their main virtue – a hopelessly negative strategy that does nothing to overcome consumer ignorance.

The twin consumer traits of over-confidence and a sometimes-stunning lack of comprehension also need some innovative consideration. Understanding the risks consumers need to cover is the first step; helping them to understand what’s available is another.

A particularly telling finding is the one that says consumers who have made a claim are more focused on the policy details than those who haven’t. One can only assume that’s because they suffered somewhat in the claim process.

ICA says the researchers interviewed frontline claims staff to obtain feedback on the most common sources of misunderstanding by product type.

“Anecdotal evidence suggests that it is generic policy exclusions, rather than exclusions that are policy-specific or less commonly known, that seem to be the cause of most misunderstanding at claim time.

“These generic exclusions, such as wear and tear, were used to develop product-specific scenarios to explore whether understanding can be applied to a particular set of defined circumstances.”

The report also contains many findings that interlink with other customer issues. For example, is consumer ignorance a factor that keeps customers loyal to the same insurer year after year? Are they too uncertain or disinclined to explore the alternatives?

Brokers should also be paying attention to this issue, even if it’s primarily about personal lines, which they long ago lost to the direct market.

In some countries – Canada is the most obvious example – insurance brokers play a major part in the selection and sale of personal lines policies for consumers. Much of the insurance advertising on Canadian TV is based around the role of the broker rather than marketing razzamatazz about being the cheapest.

In an industry that’s changing so rapidly and dramatically, everything should be up for consideration.

The ICA report is a new starting point that will hopefully lead to a reshaping of the insurance-buying process in personal lines. It has to be made less complex and more responsive. If it isn’t, the innovators will find ways to drive through the gap between consumers and insurers.

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