Lower disclosures from customers screened by financial advisors

Abstract

We find that there are fewer disclosures of risk factors when customers for life insurance are screened by financial advisors, compared with when similar profile customers are screened directly by the insurer's telephone operators. The lower rate of disclosure is systematic across all medical and lifestyle risks and has a sizeable economic impact on customer premiums. As a result, customers screened by advisors enjoy unfairly cheaper and more favorable policies. We identify the key drivers of lower customer disclosures to be conflicted incentives and lower scrutiny. We assert that the fewer disclosures from customers screened by advisors may translate into noncaptured risk that could be cross-subsidized by customers who provide more complete disclosures through the insurer's telephone operators. On reviewing our findings, the participating insurer in the study calculated that removing advisors from the screening process could allow certain insurance products to be heavily discounted while maintaining profitability.