Risk to Riches: The Importance of Financial Literacy in Insurance

By Kim Varnai & Niccolò Sapio Published on Jul. 27, 2023

The beauty of the insurance industry is its incredible versatility. Insurance matters in all aspects of life, business, and most niche moments or scenarios you might think of. With such omnipresence comes the ability to have a multifold of overlapping sections with other industries. One such overlapping section we would like to talk about today is closely tied to financial topics. More specifically, the financial literacy of the policyholder.

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Financial literacy refers to the knowledge, skills, and understanding of economic concepts and principles so that an individual is able to make sound decisions for their own future. Understanding these concepts is crucial to navigating the world with confidence. It’s fascinating to see the ripple effects when a policyholder, or future policyholder, either has or lacks financial literacy.

Defining the importance of financial literacy

Financial education is essential for empowering individuals to make informed decisions about their money. By promoting financial education, we equip people with the knowledge and skills they need to budget, save, invest, and manage debt responsibly. This knowledge helps them navigate financial challenges, achieve their goals, and contribute to economic stability. Emphasizing the importance of financial literacy enables individuals to break free from debt, gain independence, and build a brighter future.

We see financial literacy being dependent on four main pillars:

  1. Earn: referring to active income. The greater the active income of the individual, the more money they will have to spend, save, or invest.
  2. Spend: referring to budgeting skills. A financially literate person understands that you can’t spend more than you earn.
  3. Save: affecting individuals’ long-term view. Individuals will often have a set percentage of their remaining income put into retirement funds, emergency funds, or funds for some specific usage in the future.
  4. Invest: moving from the concept of active income to passive income. Key financial concepts like compound interest, money multiplier, and the entire baseline idea of generating wealth through wealth come into play.

Hence, what skills and abilities are desired in a financially literate individual? It is important for them to understand that their active income provides them with the choice to either increase their spending, save more, or invest further. Moreover, they should recognize that investing allows their money to generate greater returns over time.

Who are we selling insurance to?

How can we provide solutions to enhance individual well-being when customers are incredibly diverse and fragmented? Customer clusters can be pulled in various directions. By focusing on primary factors such as age and gender, numerous opportunities emerge.

Younger individuals express concerns about the rising cost of living and often find themselves living paycheck to paycheck. However, their outlook on life is remarkably beautiful. They value experiences and memories and possess a lesser materialistic mindset compared to older generations. This may be a way of accepting the escalating cost of living amidst stagnant salaries. Additionally, discussions around health and mental well-being are more open among the younger generation, aiming to eliminate any lingering taboos. Hence, the well-being of Gen Z depends on finding a balanced mix between freedom and maintaining a sufficient financial buffer to protect against unforeseen circumstances.

importance of financial literacy_journal and calculator on marble table

The older generation proves difficult to generalize. On one end, there are individuals with high purchasing power, while on the other, some face old-age poverty. Many of them experienced the 2008 financial crisis and were dismayed by the meager retirement savings that followed. Social inclusion and protection against sudden health changes are primary needs within this segment, overshadowing financial concerns. This insight is crucial for the insurance industry, as it indicates that financial literacy alone does not guarantee economic well-being for everyone.

The experience of well-being and the impact of financial literacy differ significantly based on gender. Women and gender-fluid individuals often face more obstacles in acquiring financial knowledge compared to cisgender men. Discussing financial matters with women can sometimes lead to a sense of intimidation and imposter syndrome, resulting in a lower likelihood of seeking financial advice.

“While financial education isn’t a cure-all, eliminating the gender gap that persists in financial literacy will almost certainly help broaden opportunities for women and improve their overall financial well-being — an effective way for insurers and others in financial services to make a positive impact while adding trust-building strategies to their value chain.”

— Sibylle Fischer, Director of Strategic Venturing at Baloise Group

There is a strong correlation between wealth and confidence in handling financial affairs. In Germany alone, the gender pay gap of 18% and the gender pension gap of 60% highlight the unfortunate impact of gender on financial well-being. Bridging this confidence gap is crucial, and our insurtech ventures team firmly believes that the insurance industry, acting as a "trusted assistant," is best positioned to address this specific issue in a meaningful way.

Here’s how Gen Z is getting financially literate

importance of financial literacy_people counting money and doing finances

Gen Z's financial literacy could be observed in their savvy usage of social media: following influencers that add value, using innovative means like budgeting tools, and filtering out information on the internet to know the difference between scams and legitimacy. On top of that, age and education level are now less important because of two key reasons. First, the internet has no age barrier, so anyone who attracts and retains an audience can make money. Secondly, since Gen Z is one of the most educated generations yet, education level has lost value as a distinguishing factor. Another interesting point is that making $50k a year seems to be a line of difference between a young individual that wants to invest some time to think about what to do with their money and a similar person who doesn’t have much interest.

What is the importance of financial literacy for insurers?

Financial literacy is crucial for the insurance industry. When individuals possess financial knowledge, they’re able to make informed decisions about insurance coverage that suits their needs. Understanding policy terms and coverage limits helps avoid disputes when filing claims. Financial literacy also highlights the importance of insurance in managing financial risks and protecting assets. Knowledge of deductibles, premiums, and exclusions allows individuals to manage costs effectively. Prioritizing financial literacy empowers consumers to optimize their insurance experience and secure the right protection.

Ways the insurance industry can offer assistance

The insurance industry is embracing collaboration with startups and harnessing digital tools to revolutionize financial literacy. Corporations can adopt a holistic approach with various short- and long-term strategies to address these issues. This may involve tackling factors that contribute to the status quo, such as gender underrepresentation in certain positions and industries or addressing disparities in childcare responsibilities between genders. Simultaneously, corporations can focus on enhancing financial education initiatives.

Despite the challenges, there are abundant opportunities for corporations in this domain. By promoting financial literacy among customers, incumbents can generate positive financial returns. Individuals with higher levels of financial knowledge are more inclined to own financial assets, leading to increased business prospects for insurance companies. Furthermore, prioritizing the well-being of customers by offering services for their future security demonstrates trustworthiness and goodwill, especially given the emotional dilemmas faced by the Gen Z generation — balancing financial security with present enjoyment and being perceived as a company that values individuals holistically rather than merely as revenue units resonates positively with this generation's values.

importance of financial literacy_earn-spend-save-invest chart

It is worth noting that there is still significant untapped potential for collaboration between startups and established corporations in this space, presenting additional avenues for innovation and growth.

Preparing for the future and addressing the importance of financial literacy in the insurance industry

In the multifaceted world of insurance, financial literacy holds immense significance. As individuals gain knowledge and understanding of financial concepts, they become empowered to make sound decisions for their future. Financial literacy encompasses the pillars of earning, spending, saving, and investing, allowing individuals to navigate their financial journeys with confidence and resilience.

Addressing the diverse needs of customers is a key challenge for the insurance industry. Younger individuals, driven by experiences and a desire for financial security, seek a delicate balance between living in the present and planning for the future. The older generation, marked by varying economic circumstances, prioritizes social inclusion and protection against health changes. Moreover, gender plays a crucial role, with women and gender-fluid individuals often facing unique obstacles in acquiring financial knowledge.

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For insurance companies, promoting financial literacy offers numerous advantages. By collaborating with startups and leveraging digital tools, they can revolutionize financial education and provide tailored solutions to diverse customer segments. Financially literate customers are more likely to own financial assets, leading to positive financial returns for insurance companies. Moreover, by prioritizing the well-being and trustworthiness of their customers, insurers can build long-term relationships and attract the Gen Z generation, which values holistic experiences and support. While challenges persist, the potential for collaboration between startups and established insurers in this space remains untapped.

By embracing innovation and focusing on customer-centric approaches, the insurance industry can unlock new opportunities for growth and contribute to the overall well-being of individuals. Financial literacy is not just a matter of personal empowerment; it is a vital component for the insurance industry to thrive in a rapidly changing world. By championing financial education, insurers can enhance customer experiences, foster financial well-being, and establish themselves as trusted partners on the path to a secure and prosperous future.

Plug and Play Tech Center'sMunich, Germany officeis situated in a city that's home to a number of large corporations and has one of the most vibrant startup scenes in Europe. Tojoin our platform, please contactKim Varnai, Ventures Analyst, orNiccolò Sapio, Partner Success Manager, for more information.