Ethical nudges and their role in tackling insurance fraud

It’s common now when taking out an insurance policy or reporting a claim, to be greeted with a warning about insurance fraud: something along the lines of ‘don’t try it or expect trouble’. It’s a warning, but need it be? Instead, why not appeal to the policyholder’s better side, to her sense of honesty and integrity?

One US motor insurer tried just that and achieved a great result. The change they implemented was very simple and delivered at little cost. It amounted to a simple nudge to the policyholder to be honest.

It was a condition of the insurer’s renewals that policyholders report their annual mileage and, in a sample of 13,488 policy forms, half had a declaration placed at the end of the form and half had that declaration moved to the beginning to the form. Policyholders were asked to sign for the same declaration wording: “I promise that the information I am providing is true”. The policy forms were identical in all other ways.

A 10% improvement

Those forms with the declaration at the beginning recorded annual mileages 10.25% greater than those forms with the declaration at the end (you can read about all the statistics and checks here). It turned out that, faced from the outset with a direct appeal to their honesty, policyholders tended to respond to that appeal.

This is perhaps not all that surprising. Think of giving evidence in a court case: you’re asked to confirm the honesty of your evidence before giving it. What this does is to activate one’s ethical self awareness from the outset, making honesty more ‘front of mind’ just before it is most needed. Leaving it until the end allows the person time to frame the information they’re just being asked to disclose within various rationalisations, such as ‘no one is going to lose out if I understate my annual mileage a bit’. Such rationalisations are dangerous, allowing a person to maintain a positive self image despite having lied.

Ethical self awareness

Encouraging ethical self awareness is of course much cheaper than most insurance anti-fraud measures. It would also resonate more positively with policyholders, appealing to their integrity rather than questioning their honesty.

So are there other little nudges that could encourage more ethical behaviour by policyholders? How about this one: rather than point out that some policyholders do commit claims fraud, how about pointing out that a huge number of policyholders do fill out their claims forms honestly. Research shows that peoples’ behaviour is influenced by what they know of how other people have behaved in similar circumstances. Changing the emphasis in this way allows policyholders to associate themselves with the honest majority position and behave in conformity with it.

I’m sure there are other ‘ethical nudges’ like this that could help tackle insurance fraud. If claims directors want their teams to think more innovatively, this seems a good place to start.