December 2022
Earlier this year, the Insurance Authority (“IA”) published the results of its first insurance literacy tracking survey, to assess the level of insurance literacy in Hong Kong. So just how “insurance literate” is Hong Kong? Well, let’s take a look by summarizing the results in this edition of Policyholder Corner.
Before we do that, however, we need to ask……
What is insurance literacy?
According to the survey, is:
“Insurance literacy is a combination of knowledge and skills, attitude and behaviour necessary to make sound decisions in relation to insurance.”
Essentially, the IA’s survey asked a series of questions about insurance to around a thousand people across Hong Kong’s 18 districts, to assess the general level of insurance literacy in Hong Kong. The results look at the level of insurance literacy in each of the categories included in the definition – i.e. “knowledge and skills”, “attitude” and “behaviour” - as well overall across all three categories.
Why should we care about being insurance literate?
Insurance performs a vital function in society by enabling people and businesses to safeguard against financial losses. Think about it…
Life insurance provides peace of mind by ensuring your family and dependents are taken care of should you pass away prematurely. Life insurance products with savings and investment elements also protect against the risk of outliving your savings, so that you can have peace of mind in your old age.
As far as non-life insurance in concerned, think about this: No building can be built, no car can be put on the road, no ship can be put to sea, no airplane can fly and no satellite can be launched, without insurance being in place to manage the risk of the venture.
So insurance is vital. It underpins social development, supports businesses, promotes economic growth, fosters innovation and serves as an engine of progress. Hence, the more inclusive a society is with regards to insurance coverage (i.e. the more people that buy insurance) the healthier society becomes. And it is this which makes it vital that people not only buy insurance, but also make sound decisions in relation to their insurance purchases. This is why insurance literacy matters.
So let’s now look at how insurance literate Hong Kong is.
How does Hong Kong fair in terms of insurance “knowledge and skills”?
“ Knowledge and skills” regarding insurance forms an important element of insurance literacy. “Knowledge” refers to a person’s understanding of insurance principles, terminology, product features, and rights and responsibilities of policyholders. “Skills” means a person’s ability to apply that knowledge in making insurance decisions.
In terms of knowledge and skills, the survey found the general level of insurance literacy to be “moderate” with a score of 55%1 .
Overall, respondents were aware of policyholders’ rights (for example 67% of respondents knew about the right to cancel life insurance policies during the “cooling-off period”) and had a general understanding of insurance principles (with 65% of respondents acknowledging the value of insurance in mitigating the risk posed by low frequency but high severity mishaps). This was balanced against more limited knowledge about risk exposure and protection needs (for example only 24% knew that a tenant needs home insurance). Further, only 39% of respondents managed to distinguish between insurance agents and insurance brokers (for those interested in this, the difference was covered in the 2nd issue of Conduct in Focus here.
What about “attitude”?
When it comes to insurance literacy, “attitude” refers to a person’s degree of favourability towards, trust and confidence in, and perceived value of insurance.
Again the overall score on “attitude” was moderate at 54%. The score was elevated by 76% of respondents recognizing insurance as a tool to provide protection against adverse financial consequences of unforeseen events such as accident and illness and 59% viewing insurance as being important for everyone. The score was also underpinned by 58% of respondents trusting insurance intermediaries’ advice on insurance (albeit only 52% believed that insurance companies are addressing the needs of their customers).
Balanced against this was the sense amongst the majority of respondents (60%) that their insurance purchases were affected by choice overload, which made it difficult to select the best policy.
And in terms of “behaviour”?
“Behaviour”, in respect of insurance literacy, looks at how a person goes about purchasing insurance, their actions after purchasing insurance, and the extent to which this impacts their financial wellbeing (e.g. do they compare insurance products, seek advice, are they willing to invest time when buying insurance, do they procrastinate in making a purchasing decision, once they have purchased do they stick with their present choice at renewal or do they shop around, and do they procrastinate in filing claims).
On “behaviour” the overall score was lower at 48%, meaning “less literate”. Why was this?
Interestingly, the score was lowered by two important factors. Firstly, respondents often relied on the advice and experience drawn from family members or friends in relation to insurance coverage (with 72% citing this as the most trustworthy source of information). Secondly, almost half the policy-holding respondents admitted to their insurance decisions being influenced by promotion campaigns such as complimentary movie tickets and healthcare services offered by insurers.
Here we see three important principles of human behavioural psychology at play which, according to Dr. Robert Cialdini in his book “Influence: The Psychology of Persuasion”2 , sales practices across the world have tapped into as “weapons of influence”.
Weapons of Influence
“Social proof”
The psychological principle of “social proof” tells us that often human beings will validate how they should behave, by reference to how they observe other people behaving.
Hence (as the survey indicates) the insurance purchases we make, tend to be influenced by the insurance purchases which our friends and family have made (even though an insurance product which meets someone else’s needs, may not necessarily meet our own needs).
“Reciprocation”Another psychological principle is “reciprocation”, whereby we are hardwired to feel that we have an obligation to repay someone when that person does something for us.
So a free gift from a company in the form of a complimentary movie ticket plays on the psychological sense of reciprocation by trying to make us feel obliged to buy the company’s products.
“Scarcity”Promotion campaigns with timelimits placed on them may also try tap into the psychological principle of “scarcity”, whereby opportunities are made to seem more valuable to us when their availability appears to be limited.
These days, the psychological principle of “scarcity” goes by the name FOMO – fear of missing out.
One of the ways in which we can improve our insurance literacy in terms of “behaviour” is simply to be aware of how the psychological principles of “social proof”, “reciprocation” and “scarcity” influence the way we think as consumers. These psychological behaviours actually serve as short-cuts for our brains to make decisions, but in a way that may not be right for us. Just because a friend has bought a particular insurance, does not mean that the insurance is right for my needs. And just because an insurer gives me a movie ticket, does not mean I should buy its insurance product if it is not right for me. By being conscious of how we think, we learn that we can ignore these influences and act rationally in our own self- interest. We should do our homework when buying insurance, invest time in making an insurance purchase to ascertain which products meet our needs, take the right advice from professionals where we need it, and not be swayed by free gifts or time-limited promotions.
Other findings which dragged down the score on “behaviour” were an indecisiveness on whether or not to purchase and a lack of research (e.g. comparing different products) before purchasing or renewing. Further, only 32% of policy-holding respondents read the terms and conditions of the insurance before purchasing (with only 15% of general insurance policy-holding respondents reviewing the terms and conditions when renewing). By making people conscious of these findings, we hope the survey can serve to promote a need to counter these poor consumer behaviours and encourage people to invest a bit of time and effort in shopping around for insurance, comparing products and not procrastinating.
What other findings of interest were there?
Of the people surveyed, 90% had purchased insurance before (i.e. they were policyholders) with 10% not having done so (non-policyholders). The overall insurance literacy score for non-policyholders was 30%, much lower than the 55% score for policyholders, with trust-levels in the insurance industry from non-policyholders being low. This is an area which the insurance industry (and the regulator) has to work on in order to achieve greater levels of insurance inclusiveness across society.
The survey population was also diverse in terms of the ages of the persons surveyed. Those in the 18 to 24 age bracket scored among the lowest of the age groups surveyed with only 42%. This highlights a need to equip young people with the skills to do their own financial planning, as this is a vital life-skill.
So the overall insurance literacy score is….?
In overall terms, the insurance literacy level in Hong Kong was scored at 52% which is a “moderate” level.
Not bad, but you can do better (as my mum used to say) and, yes, the survey does denote there is a need for more work to be done in order to achieve a higher level of insurance coverage inclusivity and realize the manifest benefits this will bring to society.
Where can you find out more?
The full set of reports that make up the survey with a synopsis are available on our website here.
And if you have any questions or comments on the survey, please contact us at [email protected].
And finally, did you know….
Speaking of insurance literacy, some of the greatest authors in world literature had links to insurance.
Franz Kafka, one of the most influential authors of the twentieth century worked for 22 years in the insurance industry. It is said that his books “The Trial” and “The Castle” were inspired by this experience.
American author John Grisham’s classic novel “The Rainmaker” (also a 1997 film) was set against the background of a lawsuit against an insurance company and inspired a generation of students to become lawyers (including the author of this article!).
Winston Churchill, British Prime Minister in the second world war, was also a prolific author and was awarded the Nobel Prize for Literature. It is said that Churchill had a quote for everything. Yes, he even had one for insurance:
“If I had my way, I would write the word ‘insure’ over every door of every cottage and upon the blotting pad of every public man, because I am convinced that, for sacrifices that are conceivably small, families can be secured against catastrophes which otherwise would smash them forever.”
Churchill certainly saw the value of insurance inclusivity….and at the IA, we do too.
Note:
1 Scores above 70% represent ‘highly literate’, between 50% and 70% ‘moderately literate’, while below 50% ‘less literate’.
2 Cialdini, Robert B.: Influence – The Psychology of Persuasion – Harper Collins 2 June 2009