Paul Ricard
Hi everyone, and welcome to Oliver Wyman’s Reinventing Insurance podcast. I’m your host, Paul Ricard. Today I am with Wei Ke, a partner at Oliver Wyman, who is focusing on the intersection between pricing, sales and marketing, and financial services. Welcome, Wei.
Wei Ke
Hi, Paul. Very good to be here.
Paul
I think we’re going to be talking about a lot of very interesting things around behavioral science and a few other themes around this. Before we dive in, why don’t you introduce yourself in a few words?
Wei
Sure, Paul. Just as a disclaimer, I actually didn’t study behavioral science properly. My academic background was what I call the left side of the brain, which is purely analytics. I actually have a PhD in revenue management from Columbia Business School. But I did get into behavioral science over the years in consulting and as a practitioner, and I realized the right side of the brain, if I can put behavioral science there, is equally important. Oftentimes, you see opportunities to improve commercial outcomes using analytics, but more often, you actually find even bigger improvements through behavioral science. That’s why I got into this.
Paul
Do you have a fun example of how you helped a client, or how you mixed the left and the right sides of the brain, and achieved something greater as a result?
Wei
It started with my PhD thesis because, if you’ve been to any of the Disney stores, I would say after 2007, then you were subjected to the wrath of my PhD thesis. It was an interesting combination of analytics and a little bit of behavioral science because the problem I was trying to solve for was called merchandise placement. It was the physical placement of products on the shelves. As you can imagine, people typically think about where to put products at eye level, and those are usually high-margin products. At Disney, there are two eye levels. There’s the adult eye level and the kids’ eye level. And there are many products that are complementary to each other and substitute for each other. My thesis was about studying the broader effects on demand as a result of the location of the item and the placement of the item.
But then the analytics were the main thing because I was trying to solve the problem using a very efficient algorithm. That’s why I said they were able to implement it. And if you’ve been there recently or before, then you probably have the full effect.
Paul
So, all the parents in the US have you to thank for their kids being able to identify the most expensive items and coming out of the Disney store with a pretty hefty bill, right?
Wei
Yeah, probably.
Paul
Today, I was excited to talk with you about behavioral science and what this means for insurers in particular. I know there’s a range of perspectives that you have across the value chain. But maybe before we dive in, everybody talks about behavioral science, everybody thinks they know about behavioral science. What’s your take on this? What’s your definition? How should we think about it?
Wei
It’s pretty straightforward. It’s basically studying the behavior and psychology of typical consumers, right? And understanding how they tend to behave at the point of sale is very important. As well as there’s the level of engagement in terms of how they actually use the product after they bought it, so whether this is insurance or any other financial services products.
And so, typically, behavioral science would study, I would say, one, the behaviors that you tend not to expect because a lot of the traditional economic literature tends to focus on rational behavior. Behavioral science is something that does not focus on the rational side of behavior. So, it’s behaviors you don’t tend to expect. And then, secondly, it’s the potential psychological biases that can lead to those behaviors you don’t expect.
Paul
I think the way you describe it is also, look, as a company, whether an insurance firm or anything, we have a lot of value to provide to the customers, we want to provide more value. How do we help make that point of cross and maximize value for the customer as well, right?
Wei
Absolutely. People may have heard the term nudge. They tend to equate that to behavioral science, so the different ways of communicating the messages are actually designed to make you more likely to react to something.
Paul
If we think about insurance, and maybe, I don’t know if starting about things at the point of sale, whether it’s life insurance, home insurance or anything else, you name it. I feel like a lot of what you just mentioned has a lot of applicability, both in terms of the challenges and barriers that are being felt today and some of the potential applications of behavioral science. We’d love your take on this behavioral science at the point of sale for insurers. What’s your take?
Wei
In the early 2000s, I was a college student, and I remember having to get renters’ insurance because I was renting an apartment off-campus and had to get covered. If you recall that time, it was the web 1.0 era, just around the dot-com boom.
Paul
We just called it web at the time, not web 1.0.
Wei
That’s true, yes. None of that Web 2.0, Web 3, or whatever we had to deal with. But at least there was a website. So, I was very excited, because I was reasonably tech savvy. I got on the website for a couple of those carriers that offered these types of renters’ insurance, but every single time after spending, I would say like, five to 10 minutes filling out the form, the end result was a huge letdown.
Why? Because once you fill out the form as a consumer, you were expecting to get a quote, right? Because the whole point of doing self-service online is, “I want to be able to actually do my own research and shop.” But every single time, the end screen was, “Thank you, we will give you a call.” That basically meant there was a gap in what you were expecting the end process to be, because you were half-expecting that at least you’d get a price indication.
There weren’t any expectations that you could actually fulfill everything digitally at the time, because this was the first iteration of online fulfillment or a self-service channel. But that end result was still a huge letdown. I call that a behavioral barrier, because what will end up happening is, because it’s such a big letdown, you will lose a lot of customers because of it. They will close the browser; they will forget about it. You may call them to follow up, but then they might treat that call as just any other marketing call and then not pick up.
Paul
A lot of insurance sales are still happening through agents, and there is still a mix of direct online and offline in-person. or on the phone, or on Zoom these days. What are some barriers that you’re seeing today in that space, and what can be done to remove these?
Wei
If we level set, insurance is a product that people don’t usually think about. It’s oftentimes a requirement because of certain transactions that you have to do, whether it’s auto or home or anything properly related. Or in other cases, you start to realize that you need to have something like life insurance.
The product itself is fairly complex. There’s a lot of math behind it. Even for us, who are supposedly working in the industry and actually understand the math, or at least in principle, we oftentimes behave more like an ordinary consumer when we buy our own insurance products. That’s the challenge. It’s not like an iPhone. People don’t understand the product as much as an iPhone.
In a typical sales journey, there’s just too much information that you’re giving to the customer. And of course, a lot of it is because of compliance reasons, because you have to disclose a lot of information, but it’s information overload on the one hand. On the other hand, when a consumer doesn’t know enough about a product, they will hesitate. That’s typical behavior, human behavior. If they hesitate and you don’t do a good job in intervening in that moment.
There’s a lot of talk about, for example, omnichannel best practices. If you’re not able to just escalate and hand that over to a human at that point, you will probably lose that sale because again, as I said, it’s so much easier even after 20 years of development in the web, the browser still has an X in the top right corner if you use a Windows machine, and clicking on that button is very easy. There’s a behavioral phenomenon, which is that if you’re faced with information overload, especially in a sales scenario, it’s much easier to just close the browser and walk away, and not have to think about it.
Paul
What are the top examples that you feel have helped remove some of these barriers?
Wei
If you think about what I just mentioned, insurance is a complex product, so how do you simplify the messaging of this? Actually helping the customer to focus on the things they would comprehend on the one hand, and also at the same time comprehend in a way that is still compliant with all the regulations? There’s that aspect that has been applied in design principles.
And then there’s the notion of, I would say, sequencing of the messages and the questions that they have to respond to, especially during onboarding. Sometimes, a certain type of sensitive question might be asked too early, and that ticks people off. Maybe there’s a way to re-optimize the sequencing of it.
In other cases, I recall an insurer type called Lemonade that everyone probably knows. They came up with an idea of asking you to sign an honesty pledge early on during the onboarding process. That apparently did wonders for two things. One is, of course, it was originally designed to reduce insurance fraud. And so that was effective for that purpose. But then at the same time, it’s also interesting that just by signing an honesty pledge, it drove a higher completion rate in the onboarding process. So people, because they signed an honesty pledge, they spent time to complete all the forms as honestly as they can. And the net result is they ended up getting onboarded.
Paul
That’s very interesting. Are there other industries where you’ve seen this being handled pretty well, where you’ve seen these barriers being removed across channels to make it as seamless an experience as possible for the end customer?
Wei
Yes. Banking, for example, has also come a long way since the early days of a web banking portal. In Germany, for example, they use an interactive digital tool at a point of sale to help customers understand that they don’t just come in transactionally for one product, but rather, there’s an opportunity to explain the whole set of offers, product offers that the bank would have.
These are digital interactive tools. They’re designed using visuals. There’s one visual that was particularly interesting, where the bank used jigsaw puzzles, with each piece representing a product. Whether you’re a brand-new customer or an existing one looking to revisit your relationship with a bank, as you can imagine, the pieces that light up are probably products that you currently hold, and they have different color schemes and color coding.
Just using something as simple as that is a lot more effective than a laundry list of products. As consumers, we are indeed myopic thinkers. What I mean by that is we tend to react to information that’s presented in front of us right in that moment and not really think outside of the box.
You could be someone who has done the homework in terms of shopping around and knowing the different kinds of competitive set, but it doesn’t matter. While you’re in that moment making a decision, you only react to information that’s in front of you.
Paul
In a time where financial wellness, for example, as a whole, is a big challenge, it requires a lot of different solutions. There’s both a set of unmet needs from the customer standpoint and the ability for agents, for example, to provide a lot more value. Is there an avenue there, both in terms of product and solution design for behavioral science and all the things we’re talking about to help design new offerings, new products that will provide a ton of value for the customer?
Wei
How do you make sure that these products are packaged in a way that will resonate with a few of those typical customer segments or use cases, and so forth? I think that’s something to think about, because if you’re just going in with a build-your-own type of approach, it may only resonate with 10% to 20% of the population. That’s the typical size of population that wants to spend the effort to really understand.
Coming back to the product question that you mentioned earlier, if you give me all the options and it’s too many functionalities, as I said, that may appeal to 20% of the population that want to spend as much time as possible to be like Mr. Spock throughout the day, but for the rest of us, for the majority, it’s just too overwhelming. If you’re able to simplify that and create a couple of those bundles, that might be very helpful too.
Paul
Building on this from a pricing standpoint, pricing strategy standpoint, any other similar barriers or considerations or best practices or lessons that you may have for our audience here?
Wei
Yes, absolutely. I think pricing is an interesting thing because, of course, insurance pricing is a heavily regulated exercise, but what I’ve seen is that typically insurance pricing is cost plus, meaning they figure out all the risk costs and they just add a fixed margin on top.
It turns out that maybe it shouldn’t be a fixed margin. I think, especially for certain types of products that are more emotional in nature, meaning when a customer looks at it with all the different things that they can get covered for and once they pay attention to you, they may ascribe certain types of features and benefits with a higher willingness to pay than your typical fixed margin. Identifying what those are and understanding how to price that out is a very interesting exercise.
Paul
I know we’re coming up on time. It’s been super, super interesting. Maybe to wrap this up, we'd like to do a little bit of a words of wisdom segment here. Any final words of wisdom you would have for our audience, Wei?
Wei
Obviously, behavioral science is a pretty interesting field, and it’s fairly complex, because it can be applied in many different areas. But don’t jump immediately to nudges. Remove barriers first before you apply any nudges, because if you don’t do that, any number of nudges won’t get you past that barrier.
Paul
That’s a great one. Well, Wei, thanks so much for your time. It’s been great having you on. Really appreciate your time.
Wei
Thanks, Paul. Great to be here today.
Paul
That was Wei Ke, partner at Oliver Wyman. I am Paul Ricard, your host. Thanks for listening, and I will talk to you next time. For more information about our Reinventing Insurance series, you can find everything on our website at www.oliverwyman.com/reinventinginsurance. Thanks for listening, and I’ll see you next time.
This transcript has been edited for clarity.
