The insurance industry faces several consumer-related challenges that are often underappreciated. These challenges highlight why insurers need to adjust strategies addressing consumer behaviour to remain competitive and meet the evolving business needs.
1. Inadequate Insurance Coverage
A significant portion of the UK population remains uninsured.
People often have the perception that insurance is unnecessary, a low priority, or unaffordable. This sentiment is reinforced by the belief that insurance benefits providers more than consumers. As a result, many feel that insurance products do not offer sufficient value, especially for risks that they perceive as remote or insignificant. This mindset reflects a broader issue, where individuals fail to recognise the wide range of risks that insurance is designed to mitigate.
A young professional moving to a new area might choose not to purchase content insurance, believing their neighbourhood is safe and that crime is unlikely to affect them. Similarly, a homeowner may avoid purchasing home insurance, believing their recently renovated property is safe.
Healthier individuals may view life or health insurance as unnecessary, assuming they will not need coverage due to their good physical condition, regular exercise, or belief in maintaining a healthy lifestyle. Overlooking the risk of unforeseen conditions beyond a healthy lifestyle.
This in part explains the fact that 78% of the UK population did not have private health insurance in 2022, a vast majority that relies solely on the UK National Health Service (NHS). [1] And that 65% of UK adults do not have life insurance, despite the financial risks associated with unexpected circumstances. [2]
2. Overinsurance for Low-Risk vs. Underinsurance for High-Risk Events
A recurring issue in the insurance market is the imbalance between overinsurance for low-risk events and underinsurance for high-risk but less likely occurrences.
The risk of an event and the need for insurance should be evaluated based on both the potential consequence (severity) and probability (frequency). However, consumers often make decisions based on frequent, familiar events or activities, rather than objective and fact-based risk evaluation. As a result, many people tend to over-insure for high-probability, low-consequence events—those that occur often but involve minor financial loss, such as losing a phone or a bike. Conversely, they under-insure for low-probability, high-consequence events—those with significant financial impact but which happen less frequently, such as a house fire, severe illness, or disability.
Many people eagerly purchase insurance to cover theft or damage to their smartphones, tablets, and other gadgets—a relatively minor financial loss—but may overlook the need for more essential policies like income protection or critical illness, to safeguard their long-term financial stability. For instance, 92% of UK adults possess smartphones, with 52% of them having insured their devices. [3] While 25% of UK homes— around 7 million—do not have any form of home insurance. [4]
3. Underestimated Value of Insurance
The rise and fall of insurance uptake are significantly influenced by striking experiences and the recollection of recent events.
Consumers often make insurance decisions driven by emotional responses, recent experiences, or vivid memories, rather than relying on statistics and probabilities. When insurance is linked to rare or infrequent occurrences, the low likelihood of these events can result in the under-purchase of essential coverage, such as life, health, or disability insurance. When these rare risks become tangible, the salience of the event shifts risk perceptions and motivates insurance uptake. Experiences of recent illness, health crises, loss of income, or natural disasters can prompt individuals to purchase insurance in response to these situations. However, regardless of whether individuals choose to buy insurance, the probability of these events occurring remains constant before and after the purchase.
Homeowners might choose to purchase accidental damage cover but decline flood insurance, even if they live in a flood-prone area, because the lack of recent flooding reduces the emotional urgency to buy it. After a flood occurs, there is a sharp increase in flood insurance purchases. However, this effect is often short-lived. As a few years later when the memory of the flood fades, many people cancel their flood insurance. For instance, after the U.S. launched the National Flood Insurance Program (NFIP) in 2021, many households experienced a diminished perception of flood risk, leading to increased policy cancellations year-on-year. An analysis of flood insurance data from 2001 to 2009 highlights that, of the total policies held in 2001, only 73% were still active the following year. By 2003, this number had decreased to 49%, and by 2004, only 39% of the original policies remained in force. After eight years (2009), merely 20% of those policies were still active. [5]
A similar trend occurs across other types of insurance, particularly in policy cancellations. For instance, 15% of policyholders cancel within the first two weeks during the cooling-off period. A significant 37% of cancellations take place between 16 to 100 days, and the majority, 48%, occur between 101 to 364 days after purchase. This reflects broader industry trends, where the average cancellation rate stands at 5% annually. For a portfolio of 100,000 policies, such cancellation rates can result in financial losses ranging from £125,000 to £375,000 each year, driven by administrative costs, loss revenue, and high marketing investments. [6]
4. Ambiguity and Errors in Disclosure
The complexity of application forms, unclear instructions, and a lack of understanding often lead to costly errors in disclosure.
Disclosure remains a significant challenge in the insurance industry, as consumers are often required to provide extensive details about their health, lifestyle, or property when applying for insurance. However, confusion over what must be disclosed, combined with the complexity of the forms, frequently results in mistakes and erodes consumers’ trust. Whether these errors stem from unclear guidance or unintentional omissions, they can lead to miscalculated risks for insurers and rejected claims for consumers, leaving the householders without coverage when it’s needed most, creating anxiety. Moreover, many consumers underestimate the impact of non-disclosure, mistakenly believing that minor omissions won’t affect their policy.
Additionally, the issue of consumer trust remains a major concern. According to Which?’s Consumer Insight Tracker, 44% of consumers report that they do not trust insurance companies to act in their best interest, further complicating the relationship between insurers and policyholders. [9]
5. Addressing Insurance Fraud
Insurance fraud remains a significant challenge for both insurers and consumers.
Fraud can occur at any stage of the insurance lifecycle, from the initial application process to the point of making a claim. It manifests in various forms, including false claims, exaggerated losses, and staged incidents, all of which impact the pricing and availability of policies. These fraudulent behaviours place a financial strain on insurers, who must then recover their losses by raising premiums for all policyholders. As a result, honest customers end up paying more for their coverage.
In 2022, UK insurers uncovered £1.1 billion worth of fraudulent claims, detecting approximately 72,600 cases. [10] Among these, 29% involved property insurance fraud, such as when a homeowner inflates a claim by exaggerating storm damage to secure a larger payout than necessary for repairs. Similarly, 51% of these fraudulent cases were related to motor insurance, where individuals might stage accidents or exaggerate minor collisions to claim higher compensation. These fraudulent activities place a financial strain on insurers, who must offset their losses by raising premiums for all policyholders. As a result, honest customers end up bearing the cost, paying more for their coverage due to the dishonest actions of a few.
Leveraging Behavioural Science to Drive Business Success in Insurance
The insurance industry’s consumer challenges present a significant opportunity for businesses willing to rethink traditional approaches. By applying behavioural science, insurers can transform how they engage with customers, offering solutions that not only address coverage gaps but also enhance customer satisfaction and retention—key drivers of profitability.
Through behavioural insights, insurers can implement smarter, data-driven strategies. For example, personalised nudges and targeted communications can encourage consumers to reassess their risk exposure and ensure they are properly covered for high-impact events, boosting sales of under-purchased products like critical illness or income protection insurance. Simplifying application processes and making disclosures easier to navigate reduces costly errors, building trust and reducing claim disputes—ultimately lowering operational costs and improving the customer experience.
The use of behavioural science can also help curb cancellations and fraud. For instance, reinforcing the value of insurance over time with proactive customer engagement can prevent policy lapses, significantly reducing churn and increasing lifetime customer value. Meanwhile, leveraging loss aversion and transparency techniques in claims management can act as a powerful deterrent against fraudulent behaviour, protecting profitability.
By embedding behavioural science into their strategies, insurers can tap into consumer psychology to drive better business outcomes—enhancing customer loyalty, reducing operational risks, and increasing overall market competitiveness. This approach not only addresses today’s challenges but positions companies to capitalise on future growth opportunities in an evolving industry.