Risk Perception and Life Insurance Sales: Lessons From COVID-19
By Matt Battersby
NewsDirect, May 2021
Behavioral science reveals that consumers tend to assess risk emotionally, through perceptions rather than calculations. So, will COVID-19 change risk perceptions in the long term—and similarly increase life insurance sales? Insurers should take nothing for granted.
COVID-19 is the first pandemic of the digital age and therefore provides a unique insight into how knowledge and risk perception drive demand for life insurance. People today can access information from a wide range of sources. It has never been easier for members of the general public to become aware of the risks any new viral threat could pose to them, their loved ones, and their communities. COVID-19 also is the first major pandemic happening at a time when people could easily seek a life insurance quote online and make a purchase in just minutes.
There is evidence the pandemic sparked an increase in life insurance sales. While media reports may have exaggerated the extent of life insurance “panic shopping” at the start of the pandemic[1], the MIB Life Index[2] shows that U.S. life insurance application activity rose 4 percent in 2020, the highest annual year-over-year growth rate on record. LIMRA has also reported a 2020 increase in life policy sales, driven by strong direct-to-consumer growth of whole life and term products[3].
It seems unsurprising that COVID-19 contributed to increased life insurance sales, as demand is surely driven in part by individual risk assessment. In a series of RGA consumer surveys in South Africa,[4] those participants who reported the highest level of concern about the public health threat posed by the coronavirus also shared plans to buy insurance or a desire to buy if not for a lack of funds. Among those who indicated COVID-19 posed the greatest risk to their personal health or the well-being of family members, 21 percent purchased insurance. In contrast, only 14 percent of those who believed COVID-19 posed a low health threat purchased coverage.
A closer look at the MIB Life Index suggests the link between risk and demand may not be clear-cut, however. Early in the pandemic it became clear that mortality risk rose exponentially with age[5]; the risk of death to those younger than 40 years old was comparatively smaller than those at older ages. If risk were the primary driver of insurance demand, it would be logical to expect application activity among older populations to increase the most. The data show the opposite: according to MIB, growth in 2020 was largely driven by demand among younger age groups, with year-on-year application volume rising 7.9 percent for those age 0–44, compared to 3.8 percent for those age 45–59. In contrast, applications among those age 60 or older declined 1.7 percent. Such falling interest in insurance among older consumers stands in stark contrast with the experience of the previous two years, when application activity among consumers in the 60+ age group grew while it declined in the 044 age group.
Attitudinal research from LIMRA[6] also shows the pandemic has significantly increased the likelihood of younger adults buying life insurance more or again within the next 12 months.
The uncertainty associated with one’s individual life expectancy already makes purchasing life insurance a good economic decision for many people under age 45, and it would be surprising if the relatively modest mortality risk increase from COVID-19 changed this significantly. Yet demand for life insurance continued to grow among young people even after the correlation between age and COVID-19 mortality rates became known. According to MIB, applications in December 2020 were up 3.7 percent over December 2019, the highest year-on-year growth for the month of December since 2011.
Is Risk Knowledge or a Feeling?
Such evidence suggests that, while COVID-19 mortality risks are reduced among younger applicants, the disease is nonetheless having an impact on risk perception and is driving increased demand. Behavioral science research demonstrates perception of risk is often influenced by feelings as much, if not more, than by facts.
When people understand a reasonable threat exists, they generally are more likely to take actions to avoid risk. For example, during 2014’s avian flu epidemic,[7] when public health authorities in affected countries warned about the severity of the disease, individuals generally took precautions to curb its spread. Research into public reaction to COVID-19 has revealed a similar story—the larger the perceived threat, the more likely people are to take protective measures, such as washing hands, wearing masks, and social distancing.
However, factors beyond objective facts can, and do, influence risk perception. According to a University of Cambridge study[8] of almost 7,000 individuals in 10 different countries, men, who are statistically far more likely to die from COVID-19, were less likely to report feeling threatened by the pandemic than women.
These reactions are consistent with psychologists’ views of risk perception: perceiving a threat may push people to act, but evaluating a threat accurately is not guaranteed. Risk, to humans, is subjective—it is fundamentally about what one is feeling. Fear, disgust, and the prospect of guilt and regret turn people away from danger. Yet when uncertain, humans look to other individuals’ behaviors and their own expectations for cues about how to respond to risk. Personal experience and intuition, rather than objective facts, frequently dominate judgments and decisions.
The Cambridge research highlights that the most powerful predictor of COVID-19 risk perception was direct personal experience with the disease. Observing the physical effects of COVID-19 by seeing someone in a hospital bed who is either intubated or on mechanical ventilation is a visceral experience and far more likely to influence individual actions and decisions than abstract arguments and case numbers. People can empathize with the horror of advanced stages of COVID-19 and grasp the risk of the disease in a way that knowledge of the numbers just cannot approximate.
COVID-19 may not greatly alter overall mortality risk for the young, but the outbreak could make the overall level of risk and its consequences more salient for these consumers. For many younger people in more developed markets, the perception of dying young from natural causes has appeared increasingly remote over recent decades. COVID-19 may reinforce that youth is not a protection against mortality.
Will Increased Demand be Sustained?
If demand for life insurance is driven by risk perception, and this, in turn, is influenced more by feelings than facts, then what are the implications for insurers? Hopes that COVID-19 alone may create a paradigm shift in demand for life insurance may be optimistic. News about the coronavirus has been unavoidable for the last year, and the unprecedented nature of the pandemic has made each development salient and emotionally powerful. Buying life insurance can help relieve negative emotions provoked by a public health crisis, such as anxiety and fear. But as the pandemic eventually fades and becomes less newsworthy, so will the attention and reaction.
People do not always seek information to make more accurate, fact-based decisions. Many actively avoid useful information if it evokes painful emotions, and instead seek comfort. This is the reason many people weigh themselves less frequently when they fear weight gain or check their bank balances less often as they get into debt: some information is useful but provokes emotions people want to avoid. Similarly, most people do not instinctively seek out information about health risks or life insurance.
If COVID-19 has served to make general mortality risk more salient and, consequently, promoted risk awareness among consumers, then perhaps the pandemic may at least lay the foundation for a resurgence in life insurance sales. But we must recognize the adage that life insurance is sold, not bought, will likely hold true. Good sales techniques and great salespeople will still be needed to remind consumers that while the COVID-19 risk recedes from the news cycle, the math of mortality—and the need for protection—remains.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the editors, or the respective authors’ employers.
Matt Battersby is vice president and chief behavioral scientist at Reinsurance Group of America, Incorporated (RGA). He can be contacted at Matt.Battersby@rgare.com.