It’s no secret that the insurance industry is going through an exciting time of innovation, growth, and transformation. This certainly poses risks for insurers if they fail to adapt to these changes, but it also offers significant opportunities. Changes are also occurring among American consumers, as more economic risk has begun to shift from government and business onto the shoulders of Americans themselves. Long gone are the days of income security through guaranteed pensions; defined benefit pensions have been replaced by 401(k) plans; health insurance costs put more responsibility on the employees and less on the employers; steady guaranteed income has given way to much more volatility in people’s bi-weekly paychecks; and employer-sponsored benefits are waning as more people rely on the gig economy for work.
This “risk shift,” as political scientist Jacob Hacker calls it, provides a huge opportunity for insurers because they’re in the risk business. But it also presents a challenge. Do insurers understand what average Americans today see as their biggest risks? Do insurers know how to insure against the risks to provide the peace of mind that insurance is meant to provide? Is the insurance industry at risk itself of becoming irrelevant if it doesn’t take note of these changes and adapt products and services accordingly?
These questions were asked in research we recently completed looking at the insurance needs of low- to moderate= income (LMI) Americans, defined as having household incomes of less than $60,000. Based on that research, there are three main takeaways for the insurance industry for how to stay relevant in today’s changing landscape.
1. LMI individuals largely rely on savings and borrowing to cope with shocks, even shocks that are insurable. (These shocks can range from relatively minor ones, like an unexpected repair or expense, to something much more serious, like a major illness or the death of a family member.) The risk here, of course, is that, while self-insuring with savings and assets may seem sufficient in theory, very few people have enough savings to self-insure adequately. 68% of LMI individuals report that it is very or somewhat difficult to build short-term savings, and 66% report similar difficulty in building long-term savings. Credit is equally problematic as potential over-indebtedness poses more risks to consumers.
A major takeaway from our research was that consumers are unclear about when savings are an appropriate tool to use to weather a shock and when insurance is. The interplay between savings and insurance, and other tools like credit, to build financial resilience shows how interconnected and complex people’s financial lives are.
2. A significant challenge that all consumers face is the uncertainty of their insurance coverage and whether it will be sufficient in the case of a shock. The research clearly showed us that having an insurance policy in place does not necessarily mean that someone feels fully protected. Focus group participants in our research consistently indicated that they would not know if their policies, regardless of type, were adequate to protect them against a shock unless they had to actually use them. As one LMI focus group participant in Baltimore explained, “There needs to be some explanation. It is very difficult to know, except for a mandate by the state, how much is desirable.” This lack of confidence negates the peace of mind that insurance is meant to provide.
This obviously has the largest implications for LMI customers, who may in fact be inadequately covered and therefore ill-prepared to cover costs not covered by their policies.
3. LMI consumers remain uninsured not because they don’t understand the risks they should insure, but because they have to prioritize the risks that they can insure. It really all comes down to price. Finding good value for money was the most important quality that consumers looked for in an insurance company. This quality ranked higher than other seemingly important ones, such as having products that best fit one’s needs or being easy to do business with.
While shopping for the cheapest policy doesn’t necessarily mean having less insurance coverage, it may affect coverage by forgoing useful features that can provide added protection. Price is also a major influencer in the decision not to purchase insurance at all, even if people know they need it. Of those in our research without life insurance, 51% thought they needed it.
This shows that LMI consumers are forced to make complicated financial decisions based on the risks in their lives and the resources they have. I remember one woman in Baltimore with a young daughter who chose to purchase disability insurance instead of life insurance with the disposable income that she had. I would have thought that life insurance would have been the most important protection she could provide for her daughter. Yet she reasoned that a loss of income would be a significant blow for her family. She had used her disability insurance in the past, it filled an income gap and she expressed glowing satisfaction. Life insurance was important, and she knew it, but it would have to wait for another day.
See also: 4 Technologies That Are Changing Risk
This anecdote is an apt way to conclude. Consumers do not place their risks and mitigating strategies into product silos like insurers do. To stay relevant in the midst of significant societal changes, insurers should take a holistic view of someone’s financial life, and the risks they face, to better serve existing customers and, more importantly, attract new ones who are dangerously unprotected.