Jun 15, 2020 4 min read

Nudging, ethics and modern insurance design

We hear a lot nowadays about nudging and the different ways in which our choices can be orientated in a beneficial direction. It’s a concept at the heart of much ‘new thinking’ about insurance products and services. Yet nudging is a rather complex thing, with several ethical issues associated with it. Insurers seeking to incorporate it into their product and service design need to tread carefully.

A definition isn’t always the most exciting way to start a blog post, but on this occasion, it’s important to be clear. Nudges are interventions that steer people in particular directions but that also allow them to go their own way. These are the words of Cass Sunstein, co-author of the hugely influential book ‘Nudge’, which brought the concept to worldwide attention.

The Chooser Really Does Matter

It’s worth adding in a few more comments by Sunstein. Firstly, the objective of nudging is to influence choices in a way that will make choosers better off, as judged by themselves. Secondly, to qualify as nudging, an intervention must not impose significant material incentives. And finally, choice architects should be focused on the welfare of choosers, rather than their own.

What happens then when an intervention falls outside of those criteria? Sunstein’s co-author, Nobel Laureate Richard Thaler, calls them sludges. Not a pretty term, but then, rather apt for some of the interventions it can encompass.

Let’s bring in a few examples from insurance.

Think of an optional policy excess. The choice here is to offer a premium reduction in return for the policyholder taking a higher excess. So long as the premium reduction reflects the reduction in risk, that looks pretty much like nudging to me. The intention is to get policyholders more engaged with the benefits of managing the risk they’re presenting. Yes, there is a material incentive (in the form of a reduced premium), but its significance sits within the context of that reduced risk.

Consider a policy warranty, such the locks endorsement found on some household policies. That’s not nudging, for while it can reduce the risk of a theft loss (and so benefit both insured and insurer), there is not much of a choice on offer. The only alternative to the locks endorsement is not being insured.

Why Nudges are Featuring More and More in Insurance

Now, we know that a significant trend in insurance at the moment are the parallel concepts of personalisation and behavioural fairness. The focus is on the individual and the risk they present, but also, on how they behave in relation to that risk. A central tenet of personalisation (at least as presented to the public by the sector) is for the individual to be actively encouraged in lots of little ways to reduce their risk. This can take the form of information (think of those wearable trackers and health insurance) and incentives, such as gym membership for certain goals being achieved.

These bring the language of nudging very much into the heart of how insurance is developing. Yet are these actually nudges? Many of them seem to have very big question marks hanging over them. Yes, the language is all about influencing you to improve your health, but there are some significant material incentives at play here. Yes, these are interventions designed to influence the welfare of the chooser, but also (and probably more so) the welfare of the insurer as well. And yes, the individual can choose to exercise less and pay more in premium, but at the same time, that lack of exercise could be a necessity, not a choice.

The Language of Nudging is not Enough

What this adds up to is that the design of some traditional policies and many modern ‘insurtech’ policies may speak the language of nudging, but fail the eligibility tests set by the very people who championed the concept in the first place.

Does this matter though? Is it just some academic nitpicking? I don’t think it is, for two reasons. Firstly, a lot of the language around those modern ‘insurtech’ policies is steeped in nudging terms. The danger here is that they don’t actually do what it says on the tin (or at least only in amounts small by comparison with their main purpose).

And secondly, there’s the whole question of trust. People will end up not trusting this new wave of ‘insurtech’ insurance if they find these modern policies to be more about coercion (for example, go to the gym to keep the cover) and less than transparent as to wider their intentions (for example, enabling mid term adjustments to a long term policy).

Context Matters

What is clear then is that a lot depends on context. How is the ‘nudging’ being framed? Is it trying to trigger certain behavioural biases in the policyholder? Are the ends being talked about (for example, a healthy life) being promoted too generically to provide a realistic context for the choice (i.e. the means) immediately in front of the policyholder?

Clearly, transparency matters here. A true nudge has a level of transparency that allows the chooser to understand the merits of the nudge and make an informed choice as to which direction to go. Without that transparency, it’s not nudging but manipulation. Build too many of those into the lifetime of your policy and you risk having the gains you make swept away in court.

The key skill for weighing up these questions is of course that of handling ethical dilemmas. As Sunstein


, “where the goals are legitimate, an evaluation of ethical concerns needs to be made with close reference to context”. And that ‘handling of ethical dilemmas’ skill needs to be supported with knowledge of the ethical issues involved, such as autonomy, identity and transparency.

To Sum Up

The 2020 PwC CEO survey found that “…insurance CEOs are increasingly concerned about public trust. Without winning this trust, it will be difficult for insurers to bring their expertise to bear.”

And trust in the new digital products and services with which these insurance CEOs are striving to succeed in the market will, as emphasised earlier, depend hugely on at least the policyholder not feeling coerced or manipulated, and hopefully, engaged with in an open and honest way.

A lax attitude around product design and product promotion puts that at risk. That’s why an ethical perspective and an authentic customer voice are needed from the very outset of a product’s design and delivery.

Duncan Minty
Duncan Minty
Duncan has been researching and writing about ethics in insurance for over 20 years. As a Chartered Insurance Practitioner, he combines market knowledge with a strong and independent radar on ethics.
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