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17/02/2015 1 Consumer Behaviour and Product Design Kathy Byrne 12 th February 2015 12 th February 2015 “if the market worked perfectly and consumers were completely rational then there would be no need for us. In that world firms would treat their customers fairly because it was in their interest to do so and consumers would buy products and services that were in their best long-term interest.” Clive Adamson, FCA Director of Supervision , May 2014

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Page 1: Consumer Behaviour and Product Design...Consumer Behaviour and Product Design Kathy Byrne 12th February 2015 12th February 2015 “if the market worked perfectly and consumers were

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Consumer Behaviour and Product DesignKathy Byrne

12th February 2015

12th February 2015

“if the market worked perfectly and consumers were completely rational then there would be no need for us. In that world firms would treat their customers fairly because it was in their interest to do so and consumers would buy products and services that were in their best long-term interest.”Clive Adamson, FCA Director of Supervision , May 2014

Page 2: Consumer Behaviour and Product Design...Consumer Behaviour and Product Design Kathy Byrne 12th February 2015 12th February 2015 “if the market worked perfectly and consumers were

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Why is there a problem with the market?

Consumers

Poor Understanding

Behavioural Biases

Substantial Inertia

Fairness Difficult to

Judge

Market

Complex Products

Providers not Differentiated

Insufficient Competition

12th February 2015 3

Understanding Consumers

12th February 2015 4

Page 3: Consumer Behaviour and Product Design...Consumer Behaviour and Product Design Kathy Byrne 12th February 2015 12th February 2015 “if the market worked perfectly and consumers were

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FCA Research

12th February 2015 5

FCA Consumer Spotlight

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Page 4: Consumer Behaviour and Product Design...Consumer Behaviour and Product Design Kathy Byrne 12th February 2015 12th February 2015 “if the market worked perfectly and consumers were

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FCA Spotlight Segments

Retired with Resources

Retired on a Budget

Affluent and Ambitious

Mature and Savvy Living For Now

Striving and Supporting Starting Out Hard Pressed Stretched But

Resourceful Busy Achievers

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http://www.fca-consumer-spotlight.org.uk/

Affluent & Ambitious

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Protection ProductsLife 53% CI 24% PMI 18% IP 17% PPI 12%

Page 5: Consumer Behaviour and Product Design...Consumer Behaviour and Product Design Kathy Byrne 12th February 2015 12th February 2015 “if the market worked perfectly and consumers were

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Stretched But Resourceful

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Protection ProductsLife 55% CI 24% PMI 16% IP 9% PPI 9%

Busy Achievers

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Protection ProductsLife 62% CI 33% PMI 23% IP 11% PPI 8%

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12th February 2015 11

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Page 7: Consumer Behaviour and Product Design...Consumer Behaviour and Product Design Kathy Byrne 12th February 2015 12th February 2015 “if the market worked perfectly and consumers were

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Consumer Behaviour

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Consumer Decision Making

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Page 8: Consumer Behaviour and Product Design...Consumer Behaviour and Product Design Kathy Byrne 12th February 2015 12th February 2015 “if the market worked perfectly and consumers were

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Financial DecisionsIn

volv

emen

t

High

Low

Thinking Feeling

The FCB Grid

Financial Decisions

263 57

6 3

Quality vs Price

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Page 9: Consumer Behaviour and Product Design...Consumer Behaviour and Product Design Kathy Byrne 12th February 2015 12th February 2015 “if the market worked perfectly and consumers were

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Behavioural Biases

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Q5 Which would you choose:

A Guaranteed £1,000

B One in 5 chance of winning £10,000

C No opinion / don’t know

12th February 2015 18

Page 10: Consumer Behaviour and Product Design...Consumer Behaviour and Product Design Kathy Byrne 12th February 2015 12th February 2015 “if the market worked perfectly and consumers were

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12th February 2015 19

Q6 Which would you choose:

A £1,000 now

B £1,100 in one year

C No opinion / don’t know

12th February 2015 20

Page 11: Consumer Behaviour and Product Design...Consumer Behaviour and Product Design Kathy Byrne 12th February 2015 12th February 2015 “if the market worked perfectly and consumers were

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12th February 2015 21

Consumer Understanding

12th February 2015 22

Page 12: Consumer Behaviour and Product Design...Consumer Behaviour and Product Design Kathy Byrne 12th February 2015 12th February 2015 “if the market worked perfectly and consumers were

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Page 13: Consumer Behaviour and Product Design...Consumer Behaviour and Product Design Kathy Byrne 12th February 2015 12th February 2015 “if the market worked perfectly and consumers were

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12th February 2015 25

E2: Information Sources: Life insurance, Critical illness and Income protection

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Source: FCA Spotlight question E2 for protection combined for segments 3.Affluent & Ambitious, 9. Stretched but Resourceful and 10. Busy Achievers

Page 14: Consumer Behaviour and Product Design...Consumer Behaviour and Product Design Kathy Byrne 12th February 2015 12th February 2015 “if the market worked perfectly and consumers were

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12th February 2015 27

Health Optimism

17 February 2015 28

Page 15: Consumer Behaviour and Product Design...Consumer Behaviour and Product Design Kathy Byrne 12th February 2015 12th February 2015 “if the market worked perfectly and consumers were

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Income Optimism

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Page 16: Consumer Behaviour and Product Design...Consumer Behaviour and Product Design Kathy Byrne 12th February 2015 12th February 2015 “if the market worked perfectly and consumers were

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Loyalty and Inertia

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Page 17: Consumer Behaviour and Product Design...Consumer Behaviour and Product Design Kathy Byrne 12th February 2015 12th February 2015 “if the market worked perfectly and consumers were

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12th February 2015 33

Customer Experience & Customer Loyalty – Banks & Building Societies

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Source: Grant Thornton Customer Experience and Customer Loyalty (CLIX)

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12th February 2015

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Page 19: Consumer Behaviour and Product Design...Consumer Behaviour and Product Design Kathy Byrne 12th February 2015 12th February 2015 “if the market worked perfectly and consumers were

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Product Fairness

12th February 2015 37

Product Fairness difficult to judge

12th February 2015 38

Annuities the prime candidate for a new mis-selling scandal – Sunday Times 14/12/14

Page 20: Consumer Behaviour and Product Design...Consumer Behaviour and Product Design Kathy Byrne 12th February 2015 12th February 2015 “if the market worked perfectly and consumers were

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Annuity Market Review

12th February 2015 39

Over 50s ProductsOPINION FORMERS MAIN CRITICISMS

• Payout can be substantially less than premiums paid

• Some plans make you pay until death

• Lack of flexibility – possibility of losing everything if youstop paying in, inability to reduce premiums

• Promoted using celebrities and free gifts

11

Source: Simon Cox, Royal London, ILAG Seminar, 23rd October 2014

Page 21: Consumer Behaviour and Product Design...Consumer Behaviour and Product Design Kathy Byrne 12th February 2015 12th February 2015 “if the market worked perfectly and consumers were

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Mitigating Market Criticism

Market response

Increased price to consumers

Almost all now have premium capor a maximum term.

X Some plans still make you pay forever

Modern twist on paid up value

Flexibility to reduce premiums

• Market still operates this way

Terminal Illness Benefit

Funeral Benefit Option

Bereavement counselling

• Lack of flexibility – possibility of losing everything if you stop paying in, inability to reduce premiums

• Use of celebrities and free gifts

• Added value features

• Payout can be substantially less than premiums paid

• Some plans make you pay until death

Market Issue

Source: Simon Cox, Royal London, ILAG Seminar, 23rd October 2014

Summary and Conclusions

12th February 2015 42

Page 22: Consumer Behaviour and Product Design...Consumer Behaviour and Product Design Kathy Byrne 12th February 2015 12th February 2015 “if the market worked perfectly and consumers were

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Which segment are actuaries in?

12th February 2015 43

Consumer Behaviour and Product DesignKathy Byrne

12th February 2015


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