It’s becoming fashionable amongst insurers to talk of turning themselves into providers of lifestyle services to customers. It’s portrayed as turning insurers’ knowledge of risk into advice to customers on how to avoid losses. And it’s clear that for some insurers, this doesn’t mean the development of loss prevention services in parallel to the risk transfer offering, but as a replacement.
To quote one leading insurance consultant, this is ‘a move from indemnify me to keep me safe’. If that’s the case, what are the ethical ramifications?
Insurers have always sought to encourage what is referred to as moral hazard. This refers to the extent to which policyholders actively seek to avoid or reduce loss. And with commercial insurances, this has led to the development of a sophisticated and mature market in risk management services. So a manufacturing firm who takes a £1 million deductible on their property insurance will also buy loss prevention advice to make sure that the working level of loss is kept low.
In personal insurances, risk management has never really got off the ground. It’s confined to manipulating the premium and/or the excess, mainly in response to security features. These can be for being part of the local neighbourhood watch, or taking a higher excess. Personalised advice is unknown outside of the ‘high net worth’ segment of the market.
However, while loss prevention advice is always to be supported, the ramifications of a move from ‘indemnify me’ to ‘keep me safe’ are more profound. What such a move represents is in effect the start of a retreat from insurance. If insurers reduce their exposure to risk by moving away from insurance and into the provision of lifestyle advice, two things happen. Firstly, they stop being insurers. Secondly, market capacity falls, which then makes it harder for consumers to find actual insurance cover, or harder to find cover they can afford.
Of course, the advocates of disruption would question this, reassuring consumers that it’s all about expanding engagement and service. If so, I would question why they repeatedly talk about changing from one thing into another, using ‘out with the old and in with the new’ type language. Is risk transfer now seen as old and stale?
The problem is that in market terms, ‘old’ is often seen as mature, which has implications for growth and returns. Yet ‘new’ might turn out to be a different market altogether. Those firms formerly known as insurers will find themselves in competition with longer established and often bigger service firms. They’ll lose legislative exemptions that only insurers enjoy, such as in equalities and competition law. And their shares will be treated differently, and not always for the better.
And what about the public’s need for good old risk transfer products? There will still be a demand for them. All that risk management and lifestyle advice will reduce exposures, but only gradually, and to be honest, not to any significant extent. Losses will still happen. In the meantime, a shrinking market means less risk transfer capacity, higher premiums and more selective offerings.
Are we therefore seeing the beginning of a transition to a more polarised market? Will those able to take loss reduction steps attract the most offers and the best deals? Will those who are either unable to take the same degree of loss reduction or who have a loss, be left to try and find an offer and hope that it’ll then be affordable. The feedback I’m getting is that this polarisation is already underway.
The passport out of the ‘access to insurance’ challenges inherent in the second of those two scenarios is the acceptance of health, home and car monitoring devices. These will stream data to the firm, telling them how well your loss prevention is going and when you’ve about to become an ‘insurable risk’. Until that signal becomes available, you’re expected to buy that loss prevention advice / device.
That business model is now being taken to scale. At Ping An, the big Chinese insurer, 40% of its insurance customers now come through that ‘service first’ door. The policies they’re then offered and the premiums quoted to them, will of course reflect that earlier service history.
These trends seem most pronounced in the life and health markets. Many firms in those markets are moving to a ‘capital light’ model, in which the firm creates and sells products, takes a fee for doing so, but leaves most of the risk with the customer. Consider this recent quote from Mario Greco, chief executive of Zurich: ““In life insurance we will move to more of a service offering, developing advisory services more than taking financial risks on to our balance sheet.” Except it won’t of course be life insurance. More like life exsurance.
The talk around this move by insurers to become lifestyle companies is of them getting closer to customers. It sounds good, but in fact, their focus should be on giving consumers reasons to get closer to them. The difference between the two is trust.
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.