Why your P&C clients are underinsured (and how to fix it)

Many clients don’t buy the insurance coverage they need, even when they can afford it.

Contrary to popular belief, it’s not always about money. It’s often about perception, framing, and behavioral biases.

That’s where the role of advisors come in. Through the strategic use of behavioral economics and psychological pricing strategies, they can help clients see the downsides of being underinsured and the true value of full coverage.

“At its core, this isn’t about selling more insurance. It’s about understanding how people think, recognizing where perception diverges from reality, and guiding clients to decisions that truly protect their financial stability,” said Michelle Youshock, head of personal lines at World Insurance Associates.

Why clients underinsure

Clients don’t underinsure because they can’t afford coverage. They underinsure because of how they perceive risk.

“Where I see it most often is in dwelling limits, liability coverage, and deductibles. Clients will cap coverage based on what 'feels reasonable' rather than what it would actually cost to rebuild or protect their assets,” Youshock noted.

From a behavioral standpoint, this is driven by present bias and optimism bias -- prioritizing today’s premium over a future loss, and underestimating the likelihood or severity of that loss.

There’s also a strong anchoring effect.

“If a client is used to paying a certain premium, anything higher feels excessive, even if their exposure has significantly increased and they need the additional protection,” Youshock explained.

The value of framing

At the end of the day, how coverage is framed plays a major role in decision-making. When you present premiums annually, the number can feel overwhelming.

However, when you break it down monthly or relate it to something tangible, such as the cost per day to protect a home or lifestyle, it becomes more approachable.

Similarly, bundling coverage can shift the perception from “multiple expenses” to a more cohesive protection strategy.

“Framing isn’t about minimizing cost; it’s about helping clients contextualize value,” Youshock said.

She’s seen firsthand how changing the conversation changes the outcome. When advisors move away from quoting and walk a client through the financial impact instead, decisions improve.

“For example, instead of asking if they want to increase liability limits, we quantify what a major loss or lawsuit could mean relative to their assets or income," Youshock explained. "When clients can clearly see the gap -- not abstractly, but in real dollars -- they make different choices. What works is making the risk real and the tradeoff clear."

How behavioral insights can lead to smarter decisions

Helping clients understand the “cost of being underinsured” comes down to specificity and relevance. General statements that can apply to virtually anyone with a home or car, for example, don’t resonate.

“However, when you say, 'If your property is underinsured by $150,000, you’d need to come up with that amount out of pocket to rebuild it,' you reframe the decision," Youshock said. "This strategy moves the conversation from price sensitivity to financial consequence."

Advisors can, and should, use behavioral insights ethically to guide better outcomes. Setting strong default recommendations, showing side-by-side comparisons, and using anchoring with appropriate coverage levels are all effective.

The key is transparency. The intent should never be to push a higher premium, but to help clients make informed decisions that align with their actual risk.

Your job as an advisor is to empower clients to select the level of protection that reduces the risk of financial surprise and provides the peace of mind they deserve.

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Anna Baluch is a finance reporter and writer with more than a decade of experience. Contact her at [email protected]