Loss aversion and insurance claims

We Germans love insurance. I guess if you see your country bombed a couple of times a century, you really start to value the benefits of home insurance. The attitude towards insurance and the size of the insurance market seems very much driven by cultural differences. In general, it seems to me that countries that have a stronger tradition of financial planning like the US and the UK as well as countries that are culturally prone towards a less optimistic outlook on life (I am looking at you, my fellow Germans) have a higher demand for insurance. 

But while insurance markets relative to the overall economy seem to be bigger in the US, the UK and Germany than in other countries, there is another component that is needed to create this demand: trust. If you don’t trust your insurance provider to pay you when you have a claim then you certainly won’t buy one. There is clear evidence that people who trust insurance companies more, will buy more insurance. 

Wow, Joachim, that really is a deep insight…

Ok, it isn’t. But what is interesting is the question of what drives trust in insurance companies because the answer to this question may explain why people buy or don’t buy insurance and tell insurance companies what they can do to sell more insurance.

As it turns out, a recent study shows that the determinants of trust in insurance companies are largely what you would expect. People with higher insurance literacy (i.e. better knowledge about how insurances work) tend to trust insurance companies more. Women also tend to trust insurance companies more – something that is in keeping with other research that shows that women in general tend to be slightly more concerned about downside risks than men in financial matters. And home owners tend to trust insurances more than renters. I guess they have to…

But what I found interesting about the study was the change in trust when people made good and bad experiences with insurance companies. Of course, trust in insurance companies increased after a good experience and decreased after a bad experience. But the decline in trust after a bad experience was more pronounced than the increase after a good experience. On average, a bad experience led to a 20% bigger decline in trust than a good experience. The most dominant drivers of a decline in trust were delayed claim payments and denied claims, but a complicated purchasing process and a complicated claims process also led to lower trust.

To me, this is just another manifestation of loss aversion. If we have an insurance claim and it is denied or we have to fight forever to get it paid, we experience a financial loss. And as we know these financial losses weigh heavier than comparable financial gains. 

What this means for insurance companies is that they should bloody well get their act together and create a claims process that is easy to navigate and have a call centre that actually picks up the phone and does not put you on hold for hours on end. And when somebody finally picks up the phone, it would really be great if this person would be competent and not have to ask the supervisor for help on every f-ing question I have. And if they finally agree to pay my claim, it would be great if they could send it to the correct bank account. These idiots manage to collect the premium from my bank account every month but they are unable to send it to the same bank account when they pay a claim. What kind of incompetent operation are they running? Oh, and when it comes to raising my insurance premium, they are somehow much faster than when it comes to paying a claim. Bloody #$&*!

Not that I have made any negative experiences with insurance companies myself.

But what it also means is that there are cultural differences how negative experiences impact trust in insurance companies. The chart below shows the impact of a bad experience on the trust in insurance companies relative to a good experience. Values above 1 imply that a bad experience is worse than a comparable good experience. They also mean that insurance companies should be particularly careful about how they handle claims with these clients, because on average, the higher the ratio, the easier these clients lose trust in the insurance company. And as always, we Germans put way more emphasis on the downside than the upside. When dealing with us, avoiding bad experiences is much more important than creating good experiences. After all, we are not like those eternally optimistic Americans…

Impact of bad and good experiences on trust in insurance companies

Source: Courbage and Nicolas (2019).