What Is Insurance Literacy and Why Does it Matter?

In order to own a business, or start one for that matter, you must have business insurance. Generally speaking, this kind of insurance will protect your company from having to pay out-of-pocket for potential property damage and liability claims.

Oftentimes, it’s something business owners get simply because they need it in order to legally operate. This mindset is not so dissimilar to the outlooks around other insurance types, like health, home, and even automobile coverage.

You may or may not be surprised to learn that many individuals who purchase business insurance know very little about it. If you own a small business yourself, maybe you went with a plan because the policy was affordable. Or perhaps you went with a certain broker because of a personal referral and you just went along with their recommendation.

But do you truly know what you are paying for in terms of coverage? Is your policy doing the most it can for you?

Or do you chalk having an insurance policy up to it being just another cost of doing business and leave it at that?

Well, we’re here to tell you that you shouldn’t settle when it comes to the insurance coverage of your business or firm. Understanding your options and making an educated decision about your insurance plan is vital–even if often overlooked.

In this article, we’ll talk about Insurance Literacy as a concept, and what a lack of it can mean for business owners, brokers, and the insurance industry largely.

What Is Insurance Literacy?

Simply put: fully comprehending your plan and using your coverage properly is what is traditionally defined as “Insurance Literacy.” More commonly used within the healthcare industry, but applicable to all kinds of insurance, here’s a more detailed definition:

The degree to which individuals have the knowledge, ability and confidence to find and evaluate information about their plans. They will use this knowledge to select the best plan for their circumstances. And once enrolled, they will use their insurance to cover appropriate costs and claims. 

Insurance Literacy: You’re Not Alone

It seems basic enough. It’s something you need to run a business, own a home and drive a car. So you get it. All plans are pretty much the same, right?

There’s so much to consider when it comes to choosing the right insurance plan. Besides, you wouldn’t pay for something without understanding what you’re getting for a dinner out at a restaurant – “Bring me anything off the menu that is less than $30 please,” said no diner ever. 

So, why would you be willing to leave something of such great importance up to chance? 

The Role of Choice Architecture in Insurance Literacy 

As a consumer of insurance, you are your best advocate. We can tell you what to look for and how plans compare against one another, and even your broker will do their best to help, but nothing will beat your own attention and investment in the process. 

However, one’s own investment in the insurance policy consideration phase is generally so laxed, insurance companies have come to depend on that level of complacency and use it to help sell plans.

It’s a tactic described as choice architecture. As described by a UCLA paper in 2012, choice architecture describes the way in which a choice is presented in order to influence what a decision-maker chooses.

On an episode named Choose Carefully of the Hidden Brain podcast, host Shankar Vedantam and his guest Eric Johnson, author and the Norman Eig Professor of Business and the director of the Center for Decision Sciences at Columbia Business School, discuss how choice architecture influences outcomes across many industries, including the car insurance industry.

The pair recounts an example that involved an evaluation of New Jersey and Pennsylvania car insurance choices made by residents of the respective areas.

From the transcript: 

Shankar Vedantam: So, we’ve looked at how people can be blind to why they are making a certain choice, but the same blindness often affects people who are offering choices. Sometime ago, the states of New Jersey and Pennsylvania moved to introduce cheaper options for car insurance for consumers, but New Jersey inadvertently made it easier for customers to select the cheaper plan, Pennsylvania made it harder.

We’ll talk later on about what the states specifically did, but for now, can you tell me what difference did it actually make to consumers? You might say that car insurance costs a lot of money, people would take the time and trouble to figure out the best deal. You’ve studied what happened, did customers behave differently in New Jersey relative to Pennsylvania?

Eric Johnson: It’s actually interesting because living there and getting the forms themselves, I saw it real-time. In New Jersey, the cheaper policy was much more popular, about three times as popular as in Pennsylvania, where the expensive policy was very popular. There was a very big difference in the kind of insurance people bought in the two states.

They go on to discuss how Johnson and his colleague Dan Goldstein calculated the ultimate difference between the two states and found that customers in Pennsylvania spent two billion additional dollars, and it had a lot to do with how the options were presented to them. This became an example of passive choosing.

But active choosing is what’s best–especially when it comes to something as important as your insurance decisions. Active choosing involves more agency, and more action on the part of the consumer in order to make informed decisions.

The problem, as described in this super-dense Harvard Law paper (don’t worry, we read it for you), comes when active choice is forced upon a consumer that either doesn’t have the time or resources to understand their choices, or isn’t being given the opportunity to.

How To Get Started on Your Insurance Literacy Journey

Okay, so hopefully you understand how critical insurance literacy can be and why you really need to understand your insurance options and coverage–in that it’s not simply enough to have it. But we know that task is easier said than done. The process can be overwhelming, especially with so many choices available.

Take a breath, don’t back out now. We got you.

Start by asking yourself and your broker these questions about your business insurance policy:

When was the last time I reviewed my insurance policy?
Do I know what my current insurance policy covers?
Do I know what my current insurance policy doesn’t cover?
Do I want additional coverage?
Can I lower my premium?

If you take these questions one at a time and work to fully understand the answers, you’ll officially be on the road to achieving optimum insurance literacy.

Here at Embroker, we want to make the process simple, but also want to ensure that you feel 100% informed and confident in your decision. That’s why we have experts ready to answer your questions along with vetted coverage packages tailored to your business’s specific needs.

Want to learn more? Feel free to reach out to one of our experienced brokers. You can also get your quote today by signing up to our digital platform.