The first post in this short series looked at three trends influencing the markets for life and health insurance: increasingly sophisticated monitoring devices, the ability of underwriters to exploit big data, and the use of predictive analytics. In this post, we’ll look at two further trends and start to bring everything together, so that its ethical implications can be weighed up.
The fourth trend concerns scientific advances that have been pushing back the boundaries of what we can find out about our health and life prospects. Since the full sequencing of the human genome ten years ago, the speed, ease and accessibility with which we can find out about characteristics of our genetic makeup has only been matched by an accompanying decrease in the cost of doing so. New genetic insights into how our health evolves and maintains itself come out on a regular basis. Barriers to knowledge appear to be evaporating: it seems as if only those of our imagination remain.
The fifth trend involves a slow drift in insurance away from its historical roots in risk pooling and towards the personalisation of risk. I’ve written about personalisation in more detail here, but suffice to say that it involves risks being underwritten on a much more individual basis, using data about each of us aggregated together from a wide variety of sources. Some insurers promote such personalisation as being fairer than risk pooling, on the basis that you pay a premium closer to the risk you present. That is fine for those who claim less or present an inherently lower risk, but only to a point. Drift outside of the underwriting box into which your risk has been profiled and your premium could rocket. The more you personalise risks, the greater the spread and volatility of premiums.
Let’s bring these five trends together. As the variety and volume of personal data about our health builds, and builds faster and is adopted faster, insurers will be presented with innumerable opportunities to revisit their views on how life and health insurance can be profitably underwritten. As their handling of ’big data’ becomes more sophisticated, the use of broad categories and historic proxies will become redundant and in their place will come premiums and cover tailored to almost bespoke levels.
Just as promises to young drivers of affordable motor cover will be conditional upon the fitting of black boxes to their cars, those seeking life and health cover will find the premiums being quoted increasingly differentiated between those based (and those not based) upon the fitting of health monitoring devices at regular intervals. The resulting data streaming into insurers’ data warehouses will trigger adjustments in premium (and perhaps cover as well), based upon key indicators such as weight, blood pressure and the like. Festive celebrations will then be followed by the notification of increased premiums.
Insurers will be carried along this path by competitive pressures – it’s a market after all. They’ll chase what are seen as good risks and mark up those seen as bad. As a result, pooling will diminish and personalisation will prosper. The policyholder will be told that the cover that’s available and the premiums to be paid for it are now much more subject to their choice and control. Drive carefully on quiet roads in the day and your premiums will be low. Live a healthy lifestyle and your premiums will be low. There’s some truth in that, but only some.
When and where you drive is hugely influenced by where you live and when you work. And your health is influenced by a range of social and genetic factors, over which you have limited to no control.
While some element of personalisation is fair, it’s also true that some element of risk pooling is fair as well (for more on this, read here). Think for a moment of the life and health markets as one big cake. Cutting the cake into neat slices makes it easier and fairer for everyone to have a share. Keep on cutting and cutting however and the cake crumbles into a mass of crumbs that won’t look good on any table. The cake will have disintegrated: a similar fate could befall the life and health markets.
In the third post about the personalisation of life and health, I’ll look at a particularly significant twist that could be added to the drift from pooling to personalisation.
Duncan is the founder of the Ethics and Insurance blog and the author of its many posts. He's a Chartered Insurance Practitioner, having worked 18 years in the UK market. As an adviser to many firms on ethics issues, as well as a regular conference speaker, he is one of the leading voices on ethics and insurance.