The Geneva Association 2018 Customer Survey, conducted in seven mature economies, reveals that for half of the respondents an increased level of trust in insurers and intermediaries would encourage additional insurance purchases.
Against this backdrop, a comprehensive analysis of the role and nature of trust in insurance, with a focus on the retail segment, is set to offer additional important insights into how to narrow the protection gap —the difference between needed and available protection.
Our analysis is based on economic definitions of trust, viewed as an ‘institutional economiser’ that facilitates or even eliminates the need for various procedures of verification and proof, thereby cutting transaction cost.
While these long-established notions continue to be relevant, we are witnessing some fundamental changes in the trust landscape, triggered by digitalisation. A major impact arises from the creation of new technology-based intermediaries. They provide a trusted digital platform for large communities of people representing both the demand and supply side in the emerging sharing or platform economy.
In the more specific context of insurance, trust can be defined as a customer’s bet on an insurer’s future contingent actions, ranging from paying claims to protecting personal data and ensuring the integrity of algorithms. Trust is the lifeblood of insurance business, as its carriers sell contingent promises to pay, often at a distant and unspecified point of time in the future.
In insurance contracts, trust is embedded in a dual and reciprocal way. On the one hand, the insured, when entering into the contract and paying the insurance premium upfront, has to trust that the insurance company will pay promptly if and when the insured event occurs. On the other hand, the insurance company should be able to trust that the insured, once the premium has been paid, does not act in a way that unduly increases the probability of loss occurrence by adopting a riskier behaviour, known as moral hazard.
From that perspective, we can explore the implications of trust for both insurance demand and supply, i.e. its relevance to the size and nature of protection gaps. For example, trust influences behavioural biases such as customers’ propensity for excessive discounting, or in other words, an irrationally high preference for money today over money tomorrow. In addition, increased levels of trust impact the basic economics of insurance demand by lowering customers’ sensitivity to the price of coverage.
Trust also exerts an important influence on the supply side of insurance. The cost loadings applied by insurers to account for fraud are significant and lead to higher premiums for honest customers. Enhanced insurer trust in insurance customers’ prospective honesty would enable lower cost loadings, less restrictive product specifications and, ultimately, higher demand for insurance.
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