The draft EU directive on equal treatment is important, but for the insurance sector, it might progressively become an irrelevance. The sector is changing in ways that could soon allow insurers to circumvent details of the policyholder’s age and disabilities and instead get to know each of us in other, more personal ways. End of problem? Not at all. Indeed, there could be some serious repercussions.
Insurance underwriting is changing. Instead of risks being pooled using a comparatively small amount of underwriting data sourced from policyholders themselves, underwriters are moving towards a personalised underwriting of individual policyholders based upon a wide range of personal data sourced from the ‘data exhaust’ many of us now emit as part of our daily lives. In other words, the market seems to be moving from pooling to personalisation.
So for someone like me, insurers will look to source my physical characteristics (height, weight, blood pressure, etc.) and my social and emotional characteristics (what I eat, drink, shop for, read, like on social media, exercise). They will then convert that into marketing and underwriting insights. In markets like life and health insurance, the cover and premium I’ll be offered will be orientated less around inputs like age and disability, and more around outputs like those physical, social and emotional characteristics mentioned above. There’ll be no need to know my age; instead, just a host of outputs that influence my propensity to claim.
So when in time the EU directive on equal treatment becomes law, insurers could well point to personalised insurances as their solution. Some may feel that this is a solution, with age and disability no longer markers that an underwriter need rely on. Others will see it as another, perhaps more serious, problem.
Personalised underwriting will remove the sharing of risk that comes with pooling and replace it with individualised packages that mix risk transfer with related services. This in turn will progressively reduce the smoothing out of losses over time (this year to that year, those people with these people, etc.) and increase the volatility of loss experienced by each of us: young and old, healthy and unhealthy, etc.
The patterns of financial micro-crises that will arise from this will be experienced in different ways: some people will manage their way through them, while others will find them so disruptive that significant life changes will become necessary. This in turn will slowly but surely lead to a polarisation, between those able to absorb those financial micro-crises and those unable to. The insurance market will then focus its attention on the former and seek to re-engineer its engagement with the latter.
In high level terms, what I’m saying here is that just as pooling evolves into personalisation, that same personalisation will produce polarisation. This sounds a bit harsh, perhaps rather simplistic. That may be, but I’m reliably informed that some segments of long term insurance are already showing signs of this trend. It’s a reality that’s already emerging.
Such a reality will have repercussions. There will be a shift away from unequal treatment based upon age and disability , and towards unequal treatment based upon a capacity to get through those financial micro-crises. There will still be insurance, of course, but not always as we know it. It could evolve into a mix of risk transfer and service offerings, tilted towards risk transfer for those with the capacity to manage those financial micro-crises, and tilted towards service offerings for those without that capacity.
Insurers will point, quite naturally, to only taking account of age and disability by way of actuarial principles. In other words, that they will complying with the equal treatment directive as it will likely and eventually be implemented. Yet will this really be fair? To some, yes; to others, no. I’m minded of a speech by the former chief executive of the Financial Conduct Authority. In October 2013, Martin Wheatley said:
“For leaders today – both in business and regulation – the dominant theme of 21st century financial services is fast turning out to be a complicated question of fairness.”
Fairness is indeed a complicated question, yet it is one that has to be properly addressed, for it will shape the future of insurance. The problem at the moment is that it is being addressed in too simplistic terms, from perspectives that are too self interested.
To borrow an analogy from the scientific world, the tectonic plates of insurance are moving. The new landscape that this will produce for insurance will be shaped as much by issues like fairness, as it will by innovations like big data. The impact of all this on the insurance buying public will be much reduced if issues like polarisation, like fairness, are addressed in a more mature, rounded manner.
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