Picwell Blog

Picwell Insights: How Risk Aversion Impacts Benefits Decisions (Part 2)

Sep 21, 2022 8:45:00 AM / by Picwell

In our last blog post, we explored the idea of risk aversion, including what it is and how it affects benefits decisions. We reviewed different levels of risk aversion and how those variations impact the way employees think about their health care benefits. Now it’s time to dig even deeper and find answers to questions like,

Just how risk averse are people?

What factors tend to be associated with risk aversion? 

How Picwell Treats Risk Aversion

Before we get into our findings, let’s first explain how Picwell assesses and evaluates risk aversion. When employees use our benefits decision support solution, Picwell DX, we ask them to consider a couple of different scenarios and then select which type of health plan they would prefer under each scenario. This approach borrows from well established methods that economists and psychologists use to figure out how people feel about facing risk.

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Weights

As you can see, these scenarios require employees to evaluate the tradeoff between paying higher premiums up front for health insurance versus paying more if and when medical care is needed.

Employees’ responses to these questions help the system identify whether they have a low, medium or high level of risk aversion. Here is what the makeup of risk aversion was like among Picwell users last year.

Level of Risk Aversion 

As you can see, people were very evenly divided across these three groups, which tells us that there is a range of different preferences when it comes to risk and health plan selections.

Factors Correlated with Risk Aversion

Next, let’s take a look at a few factors that are correlated with risk aversion. In particular, we'll look at:

  • Age
  • Income
  • Family Status

Age

A lot of people may think that age would be pretty highly correlated with risk behaviors.  We would expect younger people to be bigger risk takers, but that behavior should shift as people get older. In the context of choosing health insurance, is this what actually happens?

Sort of.

Here’s the breakdown of risk aversion by generation. 

 Risk aversion by generation

The younger Gen Z and Millennial cohorts look almost identical and they tend to be slightly less risk averse, while a larger share of the older Gen X and Baby Boomer cohorts indicate that they have high levels of risk aversion. So, we do see some differences, but they are not very dramatic.

Income

Next, let’s look at income. In theory, income should greatly affect how employees think about risk but how might that affect responses? One might surmise that an employee who earns more can afford to take on more risk, but on the other hand, an employee who earns more can also afford to pay higher premiums. Which of these two scenarios is correct?

We find that it’s the latter of these two options that bears out.

Let’s take a look.

Risk aversion by income

Here, we see that in the lowest income bracket, employees are quite a bit more likely to be in the low risk aversion group, and the relationship is flipped among the highest two income groups.

So, what’s going on here?  Several factors help explain this, and not all of it is related to pure risk preferences. 

  • The relationship that we see between age and risk aversion is not as strong as what we see here with the relationship between income and risk aversion. However, incomes do typically tend to increase with age, so that is certainly a contributing factor.
  • Budgets are another factor. People with lower incomes are thinking about these questions through the lens of their own personal budgets. They may like to have more risk protection, but they can only afford to pay so much in premiums.  
  • On the flip side of this, people with higher incomes may think that lower cost health plans involve more hassle, and with their higher incomes, they can afford to pay for a more expensive plan that reduces that. In fact, this last factor has been confirmed by research that shows that people significantly overestimate the hassles involved with high deductible health plans.
Family Status

Finally, let’s look at how family status affects levels of risk aversion. The question we’d ask here is: If an employee is covering their family, not just themselves, will their feelings around risk change? The answer is yes

Employees who are covering their families are more likely to land on a higher level of risk aversion.

Risk aversion by family status  

Here’s the risk aversion breakdown based on whether employees are covering additional family members or just covering themselves. The distributions are almost mirror images of one another, and there may be a couple of different dynamics that contribute to this.

  • When employees are responsible for other people, they may be more wary of risk than they would be if they were just thinking about themselves.
  • Employees covering more family members may perceive higher levels of risk when they look at the different scenarios. After all, when employees are covering more family members, they are increasing the odds that someone on their plan will need unexpected medical care.

Risk Aversion and its Impact on Benefits Decisions

So at this point, you’re probably asking yourself, what does all of this really mean? 

As we’ve reviewed today, people have a range of preferences when it comes to risk aversion, and this is absolutely something that employees should account for when they are thinking Risk Aversionabout what health plan is right for them. The lowest cost health plan might work for employees with low risk aversion, but what about everyone else? More risk averse employees may find that their best option strikes a balance between cost savings and risk protection.

Luckily, Picwell DX is designed to take these factors into account when recommending benefits plans. When employees use Picwell, the tool's AI-driven approach evaluates the health care needs of people like them and then adjusts for personal preferences, like risk aversion, to find out which plan is going to be the best value.

The bottom line? No matter where an employee falls on their level of risk aversion, Picwell recommends the best plan for their needs and preferences. Each and every time.

Stay tuned over the next few weeks as we continue to explore how different factors affect employee benefits decisions and how your organization can help make benefits decisions easier. 



Want to help take the guesswork out of benefits decisions? Schedule a demo today to see how Picwell can help your organization.

Topics: Open Enrollment, employee benefits, benefits professionals, empower wise choices,, virtual open enrollment, risk aversion

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Written by Picwell