Picwell Blog

Picwell Insights: How Risk Aversion Impacts Benefits Decisions

Sep 20, 2022 8:15:00 AM / by Picwell

When employees hear the word “risk”, they may experience a wide range of emotions. Oftentimes, it’s associated with a type of behavior that ignites excitement and a rush of adrenaline, such as jumping off a 10’ high diving board or betting everything on black in Vegas. However, when it comes to health care benefits, the word “risk” can have quite the opposite effect, leaving employees with feelings of fear and doubt.

When it comes time to choose health benefits, many people start by asking themselves, “What if?”  

What if I need to go to the emergency room?

It’s natural to worry about these things, but different people view these risks differently. Just how much they worry about these things may be an indication of how risk averse they are, and risk aversion plays a huge role in how employees view and choose their health benefits.

What is risk aversion?

To put it simply, risk aversion describes how comfortable an individual is taking on risk. If someone is highly risk averse, they will try to avoid risk whenever possible and will opt for solutions that provide more certain and predictable outcomes, even if they know it will cost more, on average.

How Risk Aversion Impacts Benefits Decisions

As we all know, one of the key roles of health insurance is to help people pay for health care costs. Typically, when an employee pays higher premiums for their health insurance, they get more coverage in return. 

An employee who has a high level of risk aversion may prefer to spring for the higher premium plan because the peace of mind they get from knowing that they are covered from high out-of-pocket costs is worth it... The tradeoff here, however, is that if these employees don’t end up using their insurance as much as they expect, then they will have paid more in total (in the way of higher premiums) than if they went with a lower premium (a perceived “higher risk”) plan.

Levels of Risk Aversion

So, what does it actually mean to be risk averse? The scenarios below describe individuals at different levels of risk aversion: low, medium, and high.

Levels of Risk Aversion

How To Account for Risk Aversion in Benefits Decisions

As you can see, an employee’s level of risk aversion is a key factor when it comes to choosing health insurance - and at Picwell, we understand that. We know that different people value risk protection differently, and the cheapest plan may not be the best option for everyone. That’s why our benefits decision support solution, Picwell DX, takes employees’ level of risk aversion into account when making benefits recommendations.

High Risk Aversion

Here’s how it works: Picwell DX uses data-driven analytics and predictive modeling to assess and predict an employee’s level of risk and compares that with their level of risk aversion. All of this ensures that, no matter where an employee falls on the risk aversion range, they are still directed to the best health care plan for their own individual needs and preferences - every time.

Want to learn more about risk aversion? Stay tuned as we continue to cover this topic (and more!) in the coming weeks…

Topics: Open Enrollment, Health Insurance, employee benefits, benefits professionals, empower wise choices,, virtual open enrollment

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Written by Picwell