Have You Read the Terms and Conditions? The Readability of Insurance Policies
Yesterday I bought a pair of headphones. They cost me £14 (around 18 USD). The shop assistant asked me if I wanted to take out a 2 year insurance cover for my purchase at the cost of £5.50 a year against any breakages or damage. I immediately declined in the way that I do when anyone tries to sell me anything, regardless of the potential prudence of the purchase. Exactly how much mystifying small print would I have been asked to read before signing on the dotted line? And was this a good insurance offer? Given that my headphones tend to have around a two-and-a-half year life cycle before dying a death at the bottom of handbag, perhaps not.
It seems that nearly everything we buy these days comes with the recommendation of insurance cover and it’s a merry time for the insurance sellers. In the mobile phone industry, buying insurance for your smartphone is now the norm with typical rates of around 10 USD a month on top of purchase and monthly billing. For those selling automobile insurance, a 2013 analysis reported that for Direct Line, a major UK insurance brand, profits continually increase with a rise from £255 million in 2011 to £262 million in 2012 from car insurance. The report argues that profits are used to benefit shareholders - who were to receive £101m in dividends – rather than reducing customer costs – equivalent to £25 per policy holder. These depressing, though unsurprising findings feed into the bigger issue of getting insurance companies to actually pay out. What they will and won’t pay for should be set out in the terms and conditions. But, when the terms and conditions are lacking in transparency, the playing field for insurance seller and claimant is far from even.
Here we will consider:
- Just how readable are insurance policies?
- What are the implications of difficult to read insurance policies?
- What steps can be taken to improve the transparency of insurance policies to allow for genuine informed choice?
Just how readable are insurance policies?
In short ... not very.
Challenges around the language and readability of insurance policies appear to be a common issue. For example, a recent paper from the University of Connecticut exploring readability and health insurance argues, “consumers do not fully grasp their health insurance coverage because the jargon found in many health insurance contracts is impenetrable to most Americans.” Using passages from a health insurance contract approved for use in Rhode Island, the paper reports that the passages from the example contract generated a Flesch-Kincaid grade level scores of 13 and 24. This is in sharp contrast to the average Rhode Islander reading level of eighth grade.
The cost of any potential misunderstanding of insurance documentation is of particular concern for vulnerable populations. Focusing on individuals who have substance misuse disorders – in 2015 this constituted 7.8% of the US population – the California Society of Addiction Medicine set out on a quest to help consumers make informed choices about health insurance. Focusing on bronze level insurance plans, that is, the most basic level of coverage, 16 policies from 10 providers were compared and assessed by an expert panel of physicians. Findings revealed inconsistencies in language used. For example, depending on the provider, the term “facility” could be used to refer to hospital, urgent care or a skilled nursing facility and could also be used to refer to residential treatment, rehabilitation, or an ambulatory surgical center. The researchers note that without an insurance background, insurance language could be confusing and misleading relying on the consumer to translate whether a particular treatment is covered by a policy.
In term of how well insurance providers wrote for their intended audience, the researchers commented that those who were ranked highly appeared to understand that the regular consumer is probably not well informed in the world of medical jargon and so adjusted their documentation accordingly. The researchers recommend that health plans be required to be written at a level of readability suitable for sixth-grade readers.
So, what are the implications of a difficult to read insurance policy?
Simply, when faced with a policy that is too difficult to read, consumers will misunderstand the content of the policy or, baffled by the endless footnotes and small print, just won’t try and read it at all. A survey delivered to a panel of 2,000 UK consumers investigating whether people read and understood automobile insurance policies found exactly that: only 27% said that they read their policy documents and terms and conditions in full with only 17% of this group claiming to have understood all the content they’d read.
Without understanding insurance policy documentation, consumers are at the hands of paid agents working on commission. The priority for these commission based agents is likely to be making a sale. Ensuring that their customer buys the most appropriate insurance cover for their needs is likely to take less importance.
Steps to improve the transparency of insurance policies to allow for genuine informed choice
So, what can be done to improve the readability of insurance policies?
- The creation of easy comparison tools by expert but impartial bodies. For example, the study into insurance plans covering substance misuse disorders described above resulted in the generation of the Consumer Guide and Scorecard: Health Insurance Coverage in California for Substance Use Disorders & Mental Health. This 20-page report was written and complied with the aim of clarity and readability. As highlighted by the researchers, the scorecard illustrates a role and a capacity for professional associations to raise awareness and improve understanding of issues that impact on those vulnerable individuals they are there to support.
- Emphasis on the benefits of using readability standards to the insurance industry: While the emphasis is often on the value to the consumer of more readable insurance policies, benefits could extend to the insurer. A recent paper advocating for the use of readability formulas in insurance industry highlights that making insurance policies more readable would avoid unnecessary customer complaints and so would save the insurer money and time. Also, presenting information in an easy-to-read format could help convince the consumer that they want to buy the insurance product. From this perspective there is a value to the supplier as well as the consumer to make insurance texts more readable.
- Continuing the campaign for Plain English: The movement for Plain English – that businesses and government be required to write their policies so that readers can actually make sense of them – continues to gain momentum. There are now numerous examples of policies put in place to help ensure readability of documents aimed at the general public with 44 of the 50 US states having some requirement that insurance contracts to be written in plain English. With many champions of this movement pushing for change, the implementation of strict requirements for insurers to write at a level of readability suitable for the general public may be on the horizon.
What difference would it make?
While there is an appetite for more easily readable policies, would more readable policies actually make a difference to the consumer? A recent study set out to explore the impact of more readable policies on consumers. The researchers wanted to know (a) whether more easily readable contracts influenced consumers perceptions of their contractual position and (b) whether these contracts influenced consumer behaviour. In particular, whether consumers were willing to engage in conflict if the contractor does not meet consumer expectations. The researchers compared new and old versions of automobile insurance contracts which had been overhauled by insurance companies to make them more readable.
Researchers found that participants who received the new, easily readable version of a contract expected a greater part of automobile damage to be compensated by the insurance, compared to those who received the old, more difficult to read version. These raised expectations were, in turn, a key determinant of willingness of participants to seek information, file complaints, or undertake legal action in the event of a claim not being met. While more research is needed, this initial evidence supports the potential value to consumers of making insurance policies more readable.
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