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Behavioral Economics and Insurance Choices Improving Coverage Options for the Underinsured

William Kramer
Head of AXIS Group Benefits

  • Introduction
  • Understanding Behavioral Economics
  • Key Principles in Action
  • Uninsurance and Underinsurance – The Numbers
  • Who are the Underinsured and Uninsured?
  • Reasons for Being Underinsured or Uninsured
  • Improving Coverage Decision-Making
  • Impact of Uninsurance and Underinsurance on Employers and Employees
  • Conclusion
  • The intersection of behavioral economics and insurance has garnered significant attention in recent years. This emerging field investigates how individuals make decisions about their insurance coverage and aims to enhance options for those who are underinsured. By understanding the psychological drivers behind decision-making, insurers can customize products and policies to better suit consumer needs. In this blog, we delve into the principles of behavioral economics and how they are reshaping the landscape of insurance choices. 

    Understanding Behavioral Economics

    Traditional economic theory assumes that individuals make rational decisions based on careful consideration of costs and benefits. However, behavioral economics recognizes that human behavior is often influenced by cognitive biases, emotions, and social factors. These biases can lead to suboptimal decision-making, including underinsurance or inadequate coverage. 

    Key Principles in Action

    There are several key principles of behavioral economics that are particularly relevant in the context of insurance choices: 

    • Underestimation of Risk: Individuals may underestimate the likelihood and potential severity of negative events, such as accidents or illnesses, leading them to opt for lower levels of coverage than necessary.
    • Default Bias: Individuals often stick with the default option presented to them, even if it may not be the best choice for their needs.
    • Present Bias: People tend to prioritize immediate gratification over long-term benefits. This bias can influence decisions about insurance coverage, with individuals opting for lower premiums in the short term but risking inadequate protection in the future.

    Understanding these principles helps to illuminate why individuals choose the plans they do and provides insights into how insurers can best address their needs.

    Uninsurance and Underinsurance – The Numbers

    The number of uninsured individuals in the US has been declining since the beginning of the Covid pandemic, reaching a record low of 7.7% of the population in early 2023, according to the US Department of Health and Human Services1. Between 2020 and the first quarter of 2023, 6.3 million people have gained health coverage. In 2022, 25.6 million nonelderly individuals were uninsured. Still a huge number, but a decrease of 3.3 million from 20192.

    The increases in health insurance take-up have been largely driven by pandemic-era coverage expansions put in place by the Affordable Care Act (ACA), including continuous enrollment for Medicaid, and enhanced marketplace subsidies, which protected people with low income against coverage losses and improved the affordability of private coverage3.

    Despite these improvements, the outlook is shifting. The Medicaid continuous coverage condition ended, and states were given a year to redetermine the eligibility of 94 million Medicaid enrollees4. As a result, the number of uninsured individuals is expected to increase.

    Who are the Underinsured and Uninsured?

    To better understand the populations most affected by insurance gaps, it's important to look at who remains uninsured or underinsured. The Kaiser Family Foundation (KFF) report, Key Facts about the Uninsured Population, found that adults in working low-income families and people of color made up the majority of the 25.6 million nonelderly uninsured in 2022, and most lived in the South or West of the US. Uninsured rates for nonelderly Hispanic, and American Indian and Alaska Native people are more than 2.5 times the uninsured rates for White people, at 18%, 19.1% and 6.6% respectively5.

    Similarly, the Commonwealth Fund found that those who were underinsured, whether through an employer or individual market or marketplace coverage, were predominantly people with low income. They also found that enrollees with health problems were at higher risk of being underinsured than healthier people6.

    Reasons for Being Underinsured or Uninsured

    Among uninsured workers who are offered coverage by their employers, cost remains the number one barrier to taking up the offer. From 2013 to 2022, total premiums for family coverage increased by 42%, and the employee share increased by 39%.

    While cost remains a significant barrier to health insurance coverage, it is not the only reason people are underinsured. KFF reports that in 2022, 26.1% said they did not need or want coverage, 22.2% said signing up was too difficult and 18.5% said they couldn’t find a plan that meets their needs7.

    According to Health Insurance Plan Choice and Switching by Joachim Winter and Amelie Wuppermann, there are several possible reasons why people have difficulty making health insurance choices that are in their best interests. Firstly, they may not have a sufficient level of knowledge about the availability of products. Secondly, the products may be too complicated, making comparison and evaluation difficult. Lastly, they may be prone to biases that impede good choices, such as choosing the plan with the lowest premium, while ignoring other potential costs such as co-payments8.

    Recognizing these barriers allows us to explore how insurers can do more to support people in overcoming these obstacles and applying different strategies to reach different group according to their needs, incomes, and behaviors.

    Improving Coverage Decision-Making

    By balancing cost concerns with insights from behavioral economics, insurers can design strategies to help employees evaluate their coverage options. Key approaches include:

    • Framing and Messaging: Presenting insurance options that highlight the importance of protection and clearly explain the health conditions that the product covers and can encourage individuals to opt for more comprehensive coverage. It is crucial to provide balanced information to allow individuals to make well-rounded decisions based on an accurate assessment of risks and benefits.
    • Simplified Decision-Making: Streamlining the decision-making process for customers and reducing complexity can help overcome inertia and encourage individuals to improve their coverage.
    • Personalized Recommendations and Plan Design: Utilizing data analytics and behavioral profiling, insurers can offer tailored recommendations that align with small and medium sized companies and the needs and preferences of the wide spectrum of people they employ, including part-time employees, increasing the likelihood of selecting appropriate coverage.
    • Behavioral Nudges: Implementing behavioral nudges, such as reminders or prompts, can encourage individuals to reassess and adjust their coverage needs9.

    Impact of Uninsurance and Underinsurance on Employers and Employees

    Addressing these issues is critical. People who are uninsured or underinsured may find their medical care is delayed due to costs, negatively impacting their health, and leading to higher expenses in the long run if medical conditions worsen.

    According to KFF, in 2022 uninsured nonelderly adults were over twice as likely as adults with private coverage to say they delayed filling a prescription or did not get a needed prescription drug due to cost. They are also more likely to be hospitalized for avoidable health problems and to experience declines in their overall health10.

    Access to healthcare is, therefore, a highly valued benefit and it is in both the employer’s and employee’s best interests to have affordable and attractive healthcare plans in place for staff. By offering cost-effective, simple, and flexible solutions, and by taking the time to explain and promote these plans amongst the workforce, employers could bring down the barriers preventing people’s access to the right health insurance for their own needs.

    Conclusion

    Alongside traditional economic levers, behavioral economics provides valuable insights into the factors influencing insurance choices and opportunities for insurers to enhance coverage options for the underinsured. By leveraging principles such as loss aversion, default bias, and present bias, insurers can design more effective strategies to promote adequate protection and financial security. As this field continues to evolve, integrating behavioral economics into insurance decision-making processes holds potential to create more informed and empowered consumers.

    By adopting a behavioral economics lens, insurers can improve coverage options and address the needs of the underinsured, ultimately contributing to greater financial resilience and security for individuals and communities alike.

    • 1 https://www.hhs.gov/about/news/2023/08/03/new-hhs-report-shows-national-uninsured-rate-reached-all-time-low-2023-after-record-breaking-aca-enrollment-period.html
    • 2 https://www.kff.org/uninsured/issue-brief/key-facts-about-the-uninsured-population/
    • 3 https://www.kff.org/uninsured/issue-brief/key-facts-about-the-uninsured-population/
    • 4 https://www.morganlewis.com/blogs/healthlawscan/2023/12/medicaids-unwinding-significant-disenrollments-will-affect-plans-providers-and-patients#:~:text=In%20spring%20of%202023%2C%20the,disenrollment%20due%20to%20procedural%20deficiencies.
    • 5 https://www.kff.org/uninsured/issue-brief/key-facts-about-the-uninsured-population/
    • 6 https://www.commonwealthfund.org/sites/default/files/2022-09/Collins_state_of_coverage_biennial_survey_2022_db.pdf
    • 7 https://www.kff.org/uninsured/issue-brief/key-facts-about-the-uninsured-population/
    • 8 https://oxfordre.com/economics/display/10.1093/acrefore/9780190625979.001.0001/acrefore-9780190625979-e-51
    • 9 https://oxfordre.com/economics/display/10.1093/acrefore/9780190625979.001.0001/acrefore-9780190625979-e-51
    • 10 https://www.kff.org/uninsured/issue-brief/key-facts-about-the-uninsured-population/

    This material is for general information, education, and discussion purposes only.  Statements contained herein are not professional or legal advice of AXIS or its affiliates.  AXIS makes no representations as to the accuracy or completeness of the information contained herein and is under no obligation to update or revise the information as a result of new information, research or future events.  AXIS assumes no liability by reason of the information within this material.

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    Product information on this website is for descriptive purposes only and does not provide a complete summary of coverage, and is intended for use by licensed insurance producers. It is not an offer to sell, or a solicitation to buy, any insurance product for a particular insured. Policy terms, conditions or exclusions may vary. Coverage may not be available in all jurisdictions and is subject to underwriting. Consult the applicable insurance policy for specific terms, conditions, limits, limitations, and exclusions. No insurance product is offered or will be sold in any jurisdiction in which such offer or solicitation would be unlawful. Coverage is underwritten by one or more subsidiaries of AXIS Capital Holdings Limited.

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