Information asymmetry is a situation where one party to a transaction has more or better information than the other. In financial markets, it is often the case that the provider has more information than the poor customer about a product but does not disclose this information accurately in order to make an unsuitable sale. Life insurance is a good use-case to study in this regard. If poor customers buy life insurance at all, they usually buy endowment plans, but these are not typically suitable for them.
This project proposed to solve this problem by focusing on the disclosure aspect. Accordingly, we employed behavioural science to first understand the drivers of life insurance purchases among low-income households, and then experimental methods to test the effectiveness of diverse disclosure formats in influencing the purchase decision. We discovered that disclosures that merely provide accurate information about endowment plans are not enough to change habits. Rather, a superior alternative option should also be offered, and accurate information about its advantages over endowment plans needs to be clearly presented. Then switching behaviour follows.
Our recommendations based on this study call for simple, easy-to-understand disclosures that aid product comparison and comprehension. Specifically, our recommendations called for the introduction of a simplified Customer Information Sheet (CIS) with features explained in simple language, provision of an illustration on customized benefits and compulsory signing of both. The project has gained broader relevance, as the IRDAI has now implemented all of these recommendations and provided an illustrative CIS for insurance companies.
