Insurers are providing consumers with more choice than ever before. And while there’s a lot of obvious upside to that, there’s also some downside. Consumers become confused and unsure of which policy is best for them. Choosing the right product can then become more difficult, not less.
And in such circumstances, it’s easy for consumers to become disaffected with insurers. They feel let down when their policy turns out not to cover something that mattered. And there’s an impact on insurers too. They have to explain why cover is not available, or handle more complaints. Add in the Ombudsman and it seems to feel like one step forward and then one step back. Time for change?
Change is likely, on two fronts. One is comprehension and the other is confusion.
It would be relatively straightforward for the regulator to start analysing insurance contracts for comprehension. Algorithmic software would make this a quite easy process. The AI would score the contract based upon the type of words, their mix and their complexity. It’s not rocket science – I've used some off-the-shelf software for several years now to do exactly the same thing for the posts I write on this blog.
Such comprehension scores could then be used by the regulator to calibrate their response. For example, a poor comprehension score could trigger a requirement for increased mandatory disclosures. Perhaps even a chat between an SMCR ‘significant management person’ and the regulator.
This would incentivise insurers to make their policies clearer. In other words, if they want to have complicated policies, they will also have to explain them more thoroughly. The impact this could have on sales introduces a financial price for that complicatedness.
The second front I mentioned was confusion. It differs from comprehension in that the latter is more about weighing up the product itself, while the former is more about the outcomes experienced by those engaging with the overall purchase process. This recognises that 'the sale’ is often a multi-faceted journey, from marketing through to fulfilment.
The concept of confusion audits are being discussed for use in US financial markets. These would require the regulated firm to commission independent third parties to engage with customers, to assess how well they understood key aspects of the product they've just bought. A poor understanding of the product might then trigger some form of regulatory response.
You can see therefore that comprehension scores would be orientated around what an insurer produces, while confusion audits would focus on what the customer experiences. They are of course two sides to the same coin. Yet, like any coin, it offers up two faces to the same issue, and that issue is consumer confidence in their dealings with the insurance market.
Some insurers have told me about the lengths they are going to in order to make their policies more understandable. That's great, and it needs to be supported. The risk is that their efforts are undercut by some firms pushing for a short term pricing advantage on the back of opaque policies with poor cover. It’s a tactic that’s not unknown in financial markets.
Comprehension scores and confusion audits would help level that playing field across the market. Together they would reward those seeking to simplify their offerings and add cost to those that can’t be bothered. This would also act as a nice counter-balance to the way in which artificial intelligence has so far been largely focused on rating.
More rules rarely go down well, but remember that is not what is being talked about here. Comprehension scores and confusion audits are aimed at evidencing how well regulated firms are complying with existing rules and commitments. They’re a natural development of principles based regulation, the effectiveness of which is really only achieved by the active monitoring of actual outcomes.
Some insurance policies seem too good to be true. Others seem as clear as mud. By introducing comprehension scores and confusion audits, regulators could make a material difference to the quality of policies and their associated marketing and fulfilment.
Duncan is the founder of the Ethics and Insurance blog and the author of its many posts. He's a Chartered Insurance Practitioner, having worked 18 years in the UK market. As an adviser to many firms on ethics issues, as well as a regular conference speaker, he is one of the leading voices on ethics and insurance.