Limitations of german insurance disclosures to improve consumer understanding, with lessons for U.S. insurance practices

Germany changed its insurance regulations to require intermediaries to provide disclosures at the time of application to improve consumer knowledge and protection. The German experience is that the disclosures were incorporated well into the business process but were largely ineffective to improve consumer knowledge. This outcome is consistent with numerous studies on the limitations of disclosures, due to cognitive limitations (bounded rationality) and financial literacy. We review the German practices for effectiveness, compare German and U.S. experiences with insurance disclosures, and conclude that disclosures show little impact on consumer decisions. We recommend that disclosures could provide benefit if conveyed in better formats in line with existing research on financial services disclosures. Regulators and consumer advocates should, therefore, be restrained about general proscriptions for disclosures. Greater benefit to consumers may come from improving default coverages and raising the advisory standard for intermediaries.