How behavioral science is transforming life insurance underwriting

In life insurance, understanding the nuances of human decision‑making  and the moments when applicants misreport information  is critical to accurate and fair underwriting.  When these decisions involve intentional or unintentional inaccuracies, the consequences can be costly. Misrepresentation in applications contributes to industry losses estimated at nearly $40 billion annually, with many applicants withholding smoking or health details to avoid higher premiums.

This pervasive issue creates a "Market for Lemons" scenario, where adverse selection drives premiums up and ultimately discourages low-risk consumers. Consequently, this erosion of trust and financial strain can deter potential customers, further destabilizing the market. 

Behavioral economics is gaining traction in insurance underwriting because it offers a powerful lens into how people make decisions when money, risk, and health are involved. As insurers work to reduce fraud and tighten loss margins, these psychological insights are proving critical to understanding why applicants may fail to disclose important health information.

When filling out an application, many people aren't trying to deceive. They are reacting emotionally to perceived consequences. Fear of higher premiums, the stigma of smoking, or the anxiety of a denied policy often lead applicants to withhold details they believe will hurt them. But this behavior has ripple effects.

Inaccurate disclosures distort the insurer's view of risk. Underwriters are forced to price policies based on assumptions rather than truth. To offset this uncertainty, premiums rise for everyone. This results in an unfair system where honest applicants subsidize those who misrepresent. Over time, as prices increase, low-risk individuals exit the market altogether, and the pool becomes disproportionately high-risk.

This feedback loop compounds over time. Insurers implement more complex and invasive processes to regain control, while consumers grow more frustrated and distrustful of a system that feels opaque and punitive.

Addressing this issue requires more than stronger rules. It calls for a deeper understanding of human behavior. Behavioral economics offers that framework, giving underwriters the tools to create application experiences that encourage honesty and reduce friction. When done right, it restores trust on both sides of the transaction and builds a more resilient insurance market.

To combat nondisclosure, insurers leverage behavioral science to refine their application processes and encourage more accurate self-reporting. One effective strategy is assumption framing, where rephrasing questions to imply that a behavior is common can lead to greater honesty. For example, reframing tobacco‑use questions to normalize experimentation boosts honesty by 21%, while slider‑style weight and height tools improve accuracy by up to 71%. These methods effectively reduce misrepresentation and strengthen risk segmentation.

Additionally, contextual cues, such as framing questions with social norms or emphasizing the importance of truthfulness, further enhance response accuracy by tapping into individuals' natural inclination to conform to societal expectations. These behavioral techniques are transforming underwriting by reducing misrepresentation and improving risk assessment.

Incorporating behavioral science into underwriting is not merely an innovation but a necessity for the modern insurance industry. By understanding and addressing the psychological factors influencing applicant behavior, insurers can reduce information asymmetry, leading to fairer pricing and enhanced consumer trust. This synergy of automation and human judgment is crucial in managing risk effectively across all insurance sectors. 

Companies that apply behavior economics strategies demonstrate that collaboration across the industry can pave the way for a more transparent and efficient underwriting process, ultimately benefiting insurers and policyholders.