Convenience and Trustworthiness: A Synergetic Combination
Trust and convenience are often considered substitutes: we are increasingly accustomed to trade-off trust for convenience. Tech companies, for example, have become ever present in our lives. The convenience we receive by interacting with their technology means we’re likely to continue to engage with them, even when there are good reasons not to. In other words, convenience is a trust lubricant. A 2018 YouGov survey commissioned by the Huffington Post found that 66% of Facebook users have little to no trust in the platform's use of their data. Nonetheless, these users have continued to give Facebook their data.
Behavioral trust can be secured by convenience, whereby customers will hand over their data, spend their money, and use your services. This trust is fleeting if the company doesn’t develop the habits that generate rational, genuine trust (Botsman, 2017). This form of trust is particularly important in insuring risks with a long tail (e.g. carbon credits, life insurance, home insurance etc). Although people often make decisions based on convenience, they pass judgment based on trustworthiness. This means they will often feel ‘tricked’ into signing up to something just because it was convenient at the time. In this article, we will explain why the origins of insurance are trust-based, how the switch-and-save model eroded that trust, and how embedded insurance can restore it.
The Trust-Based Origins of Insurance
The origins of insurance are trust-based; it has been an important element of commerce and social economy for almost two thousand years.1 The first records of insurance date back to Chinese texts from 700 BC, where public granaries were used to indemnify members against famine. Members contributed cereal to a communal reserve, which was sold at affordable prices during periods of scarcity or when prices were inflated by local traders when commodities were in short supply. Subsequently, Greek ‘friendly societies’ in 600 BC were organized for the purpose of extending aid to their unfortunate members from a communal fund and to provide for the expense of a fitting burial for their members. Roman Collegia offered an early prototype of health and life insurance, covering the costs of treatment for the sick and providing care for families of deceased members.2
All these arrangements relied on trust-based relational contracts: in the absence of regulation, members needed to trust that paying into these arrangements would insure them against some future risk.
The Erosion of Trust in the Insurance Industry
The most profound change in the U.S. insurance industry in recent years has been propelled by the growth of the internet. In the absence of a broker to perform an advisory function, people only search for insurance upon acknowledging that a risk is significant enough to require insuring against. Propelled by this change in the search for insurance, insurers gradually moved to a “switch-and-save” model. This model both eroded the trust between the insurer and the insured and led to economically suboptimal outcomes for both parties. To break even in expectation, the insurance company must drive up the price charged to its current clients to cover customer acquisition costs. Because of this dynamic, both parties treat their relationship as temporary. YouGov research found that 73% of policyholders say they’re actively shopping around, and only 6% say they intend to “stick with their existing insurer.”3 We live in a world where customers increasingly expect more efficient solutions to service provision. For example, a millennial would be hard-pressed to remember the last time they had to visit a physical bank branch. The insurance industry, however, still relies on an obsolete model that is convoluted, prohibitively expensive, and counter-cultural, resulting in consumer resentment and mistrust.
Rebuilding Trust in Insurance Through Embedding
While switch-and-save has become the status quo model of insurance provision, it is not inevitable. Embedding can rebuild trust in the insurance industry by overcoming the problems brought about by switch-and-save. Instead of selling insurance to customers on an ad hoc basis, embedded insurance is incorporated as a native feature of the sale process itself. It bypasses customer acquisition costs by offering insurance at the point of need. By making the search process frictionless, this significantly increases the pool of customers buying insurance. It also counters the adverse selection of marketing-driven acquisition models and so, by adding low-risk insureds to the carrier’s pool, they can offer lower-cost policies to both low- and high-risk customers. This decrease in cost, in turn, shifts down the average cost curve, attracting even more clients who previously self-insured.
The shift to embedded insurance is attractive to the insurer and the insured in both a short- and long-term horizon. It is attractive in the short-term because, through overcoming customer acquisition costs borne by the insurer and search costs borne by the insured, it reduces the price of the premiums and expands the market for insurance. Perhaps most importantly, it is attractive in the long-term because it re-establishes a trust relationship between the insurer and the insured. Because premium pricing no longer needs to accommodate CACs, insureds wouldn’t need to switch providers at the end of every contractual period. Rather than being penalized, customer loyalty would be rewarded because the expansion of the insured pool would shift the insurance premium down, rather than up. Moreover, through bypassing the adverse selection problem that the switch-and-save model is exposed to, the insurer would have an incentive to build a trust-based relationship with its current customer pool. Probabilistically, there is no reason to believe that a pool of customers, acquired through embedding, is riskier than a person selected at random from the general population.
Embedded insurance creates a virtuous cycle whereby convenience and trust can be complements, rather than substitutes.
- Vance, W. W. (1908). Early history of insurance law. Columbia Law Review, 8(1), 1-17.
- YouGov Whitepaper, “Better Safe than Sorry”, https://yougov.co.uk/topics/resources/articles-reports/2019/09/09/better-safe-sorry