Insurance: An Effective Tool to Encourage Demand for Online Professional Services?

Lawsuit Highlights Risks

Concerns about the potential dangers linked to cosmetic procedures have long existed, with many reports of patients suffering problems after treatments. In July 2022, former supermodel Linda Evangelista made global headlines after revealing she had reached an out-of-court settlement with cosmetic company Zeltiq Aesthetics over a US$50 million lawsuit. Other, unrelated reports involving problems with cosmetic procedures include a former Miss Korea contestant who was left with one breast half the size of the other in 2008 following post-operative infections after augmentation surgery, while a South Korean high school student fell into a coma in 2013 after surgeries to reshape her nose and make her eyes look bigger.

Other mistakes have occurred in cases where procedures have been carried out by “ghost doctors”, who stand in for more qualified colleagues and perform surgeries on unwitting patients.
Prof. Li says previous research has examined how professional services platforms use risk-reduction strategies, including online customer product reviews and the offer of warranties and return policies, to encourage sales of “search and experience goods” – products or services that consumers can assess themselves, either before or after purchasing.

Yet no studies have investigated whether, and how a strategy using optional, add-on insurance covering “credence goods” – goods and services (including medical procedures) that are often very difficult or impossible to assess, even after purchase, because customers lack sufficient knowledge or technical expertise – influences online demand for such services. Prof. Li says he and his three research colleagues, Prof. Li Xinxin, Prof. Jan Stallaert and Prof. Peng Jing, all based at the University of Connecticut in the U.S., believe it was important to answer these pertinent questions.

Uncertainties Make Effective Risk Strategy ‘Crucial’

“There are no return policies for cosmetic procedures – the results often become clear only once the treatment is completed,” he says. “Such great uncertainty makes it crucial for e-commerce businesses to design effective risk-reduction strategies that encourage online demand for such professional services.” The team carried out two studies for their research, which was published in a paper titled When More Can Be Less: The Effect of Add-On Insurance on the Consumption of Professional Services. Their results have important implications for the way that professional service platforms design, deploy, and evaluate their risk-reduction strategies in the future, says CUHK Business School’s Prof. Li.

“We found that insurance is not a universally effective risk-reduction strategy for professional services, and can even be counterproductive for certain services,” he says. “Interestingly, it helps to increase the sales of low-risk treatments, but not those of high-risk ones. More importantly, offering the insurance also has a negative knock-on effect on uninsured competitors of insured procedures, regardless of their risk levels. Notably, it hurts the sales of uninsured competitors without increasing a company’s own sales and can actually lead to a drop in aggregate demand for high-risk procedures.”

Online service providers should also be aware of an intriguing “more can be less” phenomenon which the research uncovered as an unintended side effect associated with the use of insurance, Prof. Li says. Adding a new risk-reduction strategy to a group of products offered on an online digital platform can potentially heighten consumers’ expectations about treatments, and concerns about the potential risks – and reduce the overall demand for its related products, he says.

Difficulties of a ‘One-size Fits All’ Strategy

The first study saw the researchers access data from nearly 24,000 bookings covering over 1,300 high- or low-risk medical treatments, including things such as breast augmentation, double eyelid surgery, Botox injections and laser teeth whitening, on a mainland Chinese cosmetic procedures platform. They were able to review the details of bookings between March 2015 and February 2017, which covered the year both before and after the platform introduced optional add-on insurance as a risk-reduction strategy from March 2016. The results clearly showed the different effects that the use of insurance had on bookings after the launch of the risk-reduction strategy.

A second study was conducted to interpret the mechanisms of how insurance influences consumers’ behaviors. This study used a randomized control online experiment involving more than 3,000 participants on Weibo, a counterpart of Twitter in China, who were interested in cosmetic surgery. The experiment result shows that insurance can hedge against the risk of surgery only when the risk level is not too high, which explains why insurance is only effective for low-risk surgery. The experiment also shows that the use of insurance will remind consumers to think about the risk of surgery and this finding explains why consumers are not willing to buy surgery products that are even not covered by the insurance policy.

“It is hard to devise a ‘one-size-fits-all’ strategy for online professional services, because the scope and extent of the risk associated with a range of services are different,” he says. Online platforms could consider trying to improve their effectiveness by tailoring their risk-reduction strategies based on the specific risks of different types of professional services.
The research also offers valuable insights for other online professional services platforms, including those working in areas such as business or legal consultancy, personal health services, financial services and education, Prof. Li says.

When designing risk-reduction strategies to encourage online transactions, they must recognise not only the intended effect of hedging – or protection against uncertainty – for which they are devised, but also the unintended, counterproductive effects they may trigger, such as greater awareness of the risks and heightened expectations of such services.
Prof. Li says future studies into online professional services could look into areas not covered by the new research, such as the effectiveness of the different risk-reduction strategies offered by online service providers, and a close analysis of some of the other unintended effects which could influence consumers’ demand for services.