This includes our judgements when it comes to buying financial products such as protection.
As an example, Kahneman describes terrorist activity in Thailand in the 1990s when people were asked how much they would pay for a travel insurance policy that paid $100,000 in case of death for any reason. Others were asked how much they would pay for a policy that paid $100,000 for death as a result of a terrorist act. Interestingly, and despite the fact that people were far more likely to die from an event other than terrorism, they were prepared to pay more for the second policy.
Team up such incorrect assumptions with the fact that often clients are confused by the technical aspects of protection and you are halfway to understanding why we have falling rates of take-up on protection products plus a large proportion of expatriates that either do not have enough protection in place, or no life or income protection insurance in place at all.
Yet as advisers we all know the reasons why it is important for expatriates to have sufficient protection. People moving abroad to work or live, will often have taken out insurance in their country of permanent residence, but this may provide limited or no cover at all where they are now residing.
Since insurance is usually only looked at once a year when renewal comes around, the terms and conditions can often be overlooked. Similarly, a client’s situation may have changed since moving abroad; they may have married, had children or divorced. Encouraging clients to undertake a regular review of policies is therefore important and not just for life cover. The same approach applies to other key expatriate insurance cover including serious accident, critical illness, and financial protection such as family income benefit.
But getting clients to look at terms and conditions is only half the battle. And while a flexible product at the right price is a good starting point, perhaps there is also an argument for helping expatriates to think about protection in a way that they can better relate to.
What psychology and behavioral economists have shown is that people are influenced by all sorts of superficial things in their decision-making, so it’s often a question of creating situations that help explain the outcome better.
In his book, Kahneman advocates giving people freedom of choice, but framing the choice so they can fully understand the consequences. This may simply be a case of explaining situations in a way that is easily understood. For example, people are more likely to opt for surgery if told that the “survival” rate is 90%, rather than that the “mortality” rate is 10%.
Perhaps if we all take a bit more care on how we explain the benefits of insurance to our clients, we may not only see an increase in take up, but stop what is becoming a dangerously high number of expatriates without adequate protection.
David Howell is chief executive of Guardian Wealth Management
