After COVID-19, insurance must be wary of optimism bias

Optimism bias refers to our tendency to underestimate bad things happening to us. Newlyweds figure the likelihood of their own divorces as zero. Only half of them are correct. As many as 93% of drivers believe they are better-than-average behind the wheel. Most are wrong: accident statistics clearly show there are more bad drivers than good. Optimism bias is a psychological condition that can lead to bad decision-making. The insurance industry must beware of its own optimism biases to make sure they are not underestimating the impact of the COVID-19 crisis on their businesses.

In a Simon-Kucher & Partners survey conducted in April about the impact of Covid-19 on insurance, a surprising 78% of insurance executives said their companies will survive the crisis better than average. There is a big disconnect here because many of these same executives also said they expect severe consequences in the industry from the Covid-19 pandemic. They just think negative events happen to others and not to them.

This It-won’t-happen-to-me thinking can lead to a false sense of security, where we fail to take enough countermeasures to safeguard our company’s survival. The following are three areas where optimism bias can put insurers at risk.

Tomohiro Ohsumi/Bloomberg

Prepare for Face-to-Face Sales Loss
The insurance industry must beware of underestimating the negative impact COVID-19 can have on their sales capabilities. Even after the lockdown there will be an aversion to face-to-face interactions and consumers are unlikely to agree to meet in-person to discuss the suitability of insurance policies.

A self-guided online approach to address this problem isn’t going to cut it. Unlike products like auto insurance which are required by law, insurance policies typically sold through face-to-face channels such as retirement products are complex, requiring intensive advice and demand creation. Insurers must take steps now to adapt to the new landscape and develop remote-selling capabilities.

Personal consultation via video conference is an essential first step. The lockdown and fear of contracting the virus is causing consumer behaviors and preferences to change. Digital interactions for previously unthinkable interactions like medical consultations are now acceptable and, in some cases, even preferred. However, some effort is needed to accommodate person-to-person consultations for the digital medium. Posture, gestures, voice and body language come across differently in remote-selling and must be managed. Remote conversations need better planning, clearer content and strong integration of the customer.

Insurers must start now to build the capabilities to support remote-selling to safeguard their ability to grow revenues. Online sales and call centers are nowhere near able to compensate for the loss in sales from the exclusive and agency channels.

Address Challenges in Multichannel Selling
Insurers must also not underestimate the extend the current pandemic will aggravate issues in the industry’s analog approach to sales and distribution. This is a makeover that has been long overdue.

For starters, the current insurance sales model is wholly prepared for multichannel selling. A systematic, approach will be needed to streamline and define the roles played by various stakeholders including local agencies, advisory hubs and contact centers. We will need a coordinated approach, with new systems and tools to support newly defined responsibilities in lead generation, lead nurturing, offline versus online sales, claims management, contract servicing, renewals and other activities.

Learn to Turn on a Dime
We cannot underestimate how rapidly consumer pricing sensitivities, preferences and priorities can shift in the digital age. New insurance customer segments and product categories are emerging, while entire segments and products are disappearing.

Customers keen to shore-up their financial immunity against a pandemic-ridden world order are demanding protection-heavy coverage and are willing-to-pay for it. There are a number of reports that the demand for life insurance is outpacing supply. The crisis has also made some policies unprofitable to underwrite. For example, some life insurers including AIG, Nationwide Mutual Insurance and Principal Financial Group are turning away business they consider too risky.

Insurers must acquire the ability to respond quickly and appropriately to market changes if they want to emerge from the pandemic well positioned for growth. They must be ready to respond to customers whose financial well-being have been negatively impacted by the coronavirus pandemic. For this segment, insurance must be affordable. Forward thinking insurers who can respond to these new sensitivities will have the advantage. For example, after the Financial Crisis of 2007-2008, a quick-thinking Progressive launched the first Name Your Price option during policy quoting to accommodate highly budget-conscious consumers. Instead of making a cheap offer, the auto insurer decided to adjust its offers based on the customer’s willingness-to-pay. It was one of the industry’s smartest moves.

Insurers must be ready to turn on a dime to bring new products with the right sales stories around them to market. They need to have the right alternatives to offer newly price-sensitive customers who are looking to cancel policies, and to find ways to adapt to new customer priorities.

We cannot underestimate how fast change happens. Insurers must build an early warning system that can detect change and translate it into winning sales stories in, through and beyond the crisis.