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It’s the End of Insurance as We Know It

Thursday, January 14, 2016
It’s the End of Insurance as We Know It
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Authored by Saeculum Research

Takeaways

  • More insurance companies are starting to base pre­miums on individual behavior rather than broadly defined risk pools. John Hancock just became the first U.S.-based life insurer to introduce this option, while auto insurers like Progressive and State Farm have been using tracking devices for several years. This move saves insurers money on claims by incentivizing policyholders to adopt better habits. But these benefits require major tradeoffs: Customers must surrender their privacy to even qualify for a chance at a discount. What’s more, an individualized system risks labeling many individuals “too risky” and unable to get coverage.
  • The behavior-based approach stands to benefit Millennials in particular. In various ways, Millennials are exhibiting a lower risk profile than previous generations did at the same age. They’re smok­ing and drinking far less, as well as pushing down rates of car and motorcycle accidents. Under traditional actuarial tables, many young people are paying inflated premiums, suggesting that this generation may have the most to gain from the use of precise data. As insurers consider how to lift sales—particularly in long-stagnant areas like life insurance—and sell tracking to consumers, this disparity could become a key marketing angle.
  • Precise data may end up giving a boost to specific insurance markets. Certain categories of insurance, including annuities and long-term care insurance, have long been hobbled by the problem of “informational asymmetry”—in which the insurer is less informed than potential buyers regarding critical probabilities such as the future risk of sickness or death. Sales of annuities have flatlined, while sales of LTC insurance peaked more than a decade ago. The proliferation of Big Data, however, will allow these insurers to price future-facing policies much more accurately—which might convince former players like Prudential to return to the market.
  • The development of quantified-self products will accelerate. The technologies for monitoring many daily behaviors, including exercise, already exist in the form of established products like the Fitbit. Other behaviors, such as driving, have required insurers to invent their own custom devices. As the range of mon­itored habits expands, the world of insurers and QS leaders is set to converge. After creating the health-monitoring app HealthKit last year, for example, Apple approached UnitedHealth and Humana to discuss possible partnerships. These discussions will only grow more common with the release of new wearables like the Apple Watch and Samsung Gear devices.

Have you checked in at the gym today? That visit could now save you money on your life insurance premiums, thanks to a new program from John Hancock and wellness company The Vitality Group. The program, the first of its kind for American consumers, rewards policyholders with points and discounts for demonstrating healthy habits. Other types of insurers are also beginning to base premiums on individual behavior—threatening to upend the traditional, pooled-risk approach to underwriting. While some see the shift as great news for both insurance companies and consumers, critics warn that it creates an Orwellian dynamic where people must surrender their privacy to benefit or risk being frozen out altogether—a possibility that Millennials find particularly disturbing.

In the John Hancock Vitality Program, customers’ premiums rise and fall depending on where they rank on four tiers ranging from bronze to platinum. Rankings are based on metrics such as daily exercise, health screenings, cholesterol levels, and flu shots—with measures that exert the strongest influence on longevity scoring the most points. The company receives continuous updates on customers’ activity through a Fitbit as well as regular questionnaires. Top customers can save as much as 15 percent on their premiums and also receive additional perks such as Amazon gift cards and half-price hotel stays.

Similar programs are being implemented by other insurers around the globe. John Hancock’s plan, for example, was based on life insurance programs already in place in Europe, South Africa, Australia, and Singapore. Auto insurers—namely Progressive, Allstate, and State Farm—set premiums based on input from “telematic” tracking devices that show how well drivers behave themselves on the road. (Activities that dock points include braking sharply and going faster than 80 MPH.) And analysts predict that it’s only a matter of time before property insurers join in and begin offering discounts to customers who take proactive steps to prevent damage to their homes and businesses.

The behavior-based approach departs sharply from the traditional insurance model. Since its creation, insurance has operated according to the law of large numbers: Companies seek to cover lots of people in order to diffuse risk and because it’s impossible to know who will be met with misfortune and when. Premiums have therefore been based on broad proxies like gender, age, and marital status. While the rise of customer monitoring doesn’t rule out the possibility that the safest driver could get hit by a falling tree or the healthiest person struck by lightning, it does allow insurance companies to estimate individual risk much more precisely.

For insurers and customers, this paradigm shift can be seen as a win-win. Data mining enables insurance com­panies to incentivize policyholders to behave better. Companies have found that customers generally opt to change their ways rather than pay more. People who have received driving tips based on data from Progressive’s Snapshot system crash less, while those in Discovery’s health monitoring program run up lower bills. In turn, their insurers save on claims. Those on the cutting edge can now cherry-pick the lowest-risk cus­tomers—and, according to one report, may end up incurring just a ninth of the claims of the least sophisticated insurers. Furthermore, these programs could cut down on fraud as well, since claims would be backed up with data.

Of course, all these benefits come at a price: privacy. Under some of these programs, insurers construct a minute-to-minute record of customers’ daily activities—and these huge data stores could easily be subpoenaed by third parties (divorce lawyers, for exam­ple) in the future. Asked to comment on John Hancock’s program, one research scientist tells The New York Times: “All of a sudden, everything you do and everything you eat, depending on which bits of the information they collect, is sitting in someone’s database.” And while these programs are all opt-in, the standard rate may come to resemble a penalty for those who don’t participate—or those who sign up but resist the nudges to get a checkup or ease up on the brakes.

Even more pressing is the concern that precise monitoring will label many people “uninsurable.” In some cases—for example, with unsafe drivers—making it harder for people to obtain insurance seems fair. Where the ethical questions become starker is with risks out of one’s control, such as those based on genetics. While several federal laws have banned genetic- or pre-existing condition-based underwriting in health insurance, these considerations remain fair game in most states for life, disability, and long-term care insurance. Individuals who develop serious health conditions or are genetically predisposed to deadly diseases are likely to be denied coverage or fail to qualify for discounted rates.

For now, behavior-based insurance remains the exception and not the norm. But with more people signing up every year, some experts predict that a slow but steady flow of insurers will continue coming onboard. This scenario is likely to appeal to Generation X, who have long migrated toward individualized solutions—whether it’s in relation to incen­tives programs or workplace benefits. Xers prefer deals that are tailored to each person’s unique circumstances—even if it means some benefit a great deal, and others perhaps not at all.

But Millennials may find the “uninsurable” question more disquieting. To them, this model is a double-edged sword. For certain types of insurance, it’s an appealing prospect: A Deloitte survey, for instance, finds that nearly two-thirds of 21- to 29-year-olds would be willing to try pay-as-you-drive auto insurance—compared to only 44 percent of respon­dents age 60 and older. Younger respondents are also less likely to say they would need a discount over 20 percent in order to be convinced. But this generation also bristles at the idea that data could be used in other cases to exclude certain customers or end up exacer­bating inequality. Rather than embracing behavior-based insurance wholesale, it’s likely that Millennials will discourage its use for actuarial categories that are beyond people’s control. In these cases, the classic pooled-risk approach would seem like a fairer option—and deliberate ignorance the only way to ensure that all receive equal treatment from the companies tasked with cushioning their fall.

Material posted on this website is for informational purposes only and does not constitute a legal opinion or medical advice. Contact your legal representative or medical professional for information specific to your legal or medical needs.

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