A recurrent narrative associated with the personalisation trend in insurance is that it will enhance the competitiveness of premiums for consumers. It being taken as a ‘natural given’ – in essence, how could this new way of doing insurance result in anything else? Yet will it? Could it in fact result in less competitive premiums? In fact, when you think about it, personalisation could seriously undermine consumer access to a competitive premium.
The influence that personalisation could have on the competitiveness of premiums can be examined on three levels. Let’s call them the signal level, the stability level and the personal level, and examine each in that order.
The Signal Level
An insurer with a competitive pricing strategy will rely heavily on signals from across the market. Their rates will be compared with others on offer in the market and adjusted according to strategic goals. Yet with personalisation, that will end. There will be no market rates, only those for individual consumers.
And so the signals of competitiveness in personalised insurance will change, in two ways. Firstly, the signal will instead become individualised - this consumer cancelling or that consumer incepting. And secondly, the signal will be binary – they left or incepted; little else. In essence, pricing signals will disappear, leaving just reaction signals behind.
Insurers will instead have to rely more and more on portfolio level performance, automated to tweak this or that measure of risk or opportunity to meet those strategic goals. It seems ironic then that just as pricing for consumers becomes individualised, insurers’ pricing radars will have to focus more on broader portfolio signals.
What will Consumers Rely On?
What about the pricing signals that consumers rely on? They will change quite radically too. Gone will be the feedback that comes from friends and neighbours. After all, an individualised premium now has nothing to do with them. You’re not like them, goes the narrative consumers will have signed up to.
And the feedback that consumers can find through price comparison websites (PCWs) will change too. Individualised premiums are based on huge amounts of data about the consumer, and PCWs will have access to only small amounts of that. They will only be able to offer consumers a generalised picture of the competitiveness of their premium. Helpful, but not reliable.
And this assumes a policy with an annual renewal. When that goes and pricing becomes ever more near to real time, PCW reliability will plummet. The data upon which personalised pricing relies will be come too fluid for the PCW / consumer relationship to manage. In essence then, the competitive premium signal that UK consumers now rely heavily on, from PCWs, will become obsolete.
Bringing this together, I’m reminded of what academics are now referring to as ‘epistemic fragmentation’. This happens when consumers are deprived of the context to decide if something is competitive or accurate or fair. Without that context, consumers are in danger of making uninformed decisions.
So what is left after this deconstruction of context, that personalisation could bring about in insurance pricing? To all intent and purpose, it will be the relative power of the parties involved that will determine the narrative for what is left. And while insurers have grown use to their relative power for shaping narratives around fairness and competitiveness, they have been recently reminded, through the super-complaint, that the currents of power relating to insurance are changing. New players are gaining a voice. Insurers need to understand the impacts this trend will have.
The Stability Level
Let’s move on and look at another level at which personalisation will impact the competitiveness of premiums. The very nature of personalisation means that consumers will be underwritten on an ever more individualised basis. Eventually, your premium will be determined by your policy’s claims and expenses – the pool of one.
As pool size diminishes towards one, so the number of pricing differences between pools increases. Sure, the pricing difference itself between adjacent pools may only be a few pence. However, the pricing difference that the consumer experiences could be significant, driven by the nature of the claim or event that triggers a price movement.
What this adds up to, when considered at the forest rather than the tree level, is greater price volatility as pool sizes decrease. And that price volatility will, for the consumer, come across as anything other than competitive. Chaotic pricing is a more accurate description of what they will experience.
So while the market will be talking about how competitive premiums become through personalisation, consumers will be experiencing something quite different. This hardly seems the way to built public trust in your market.
The Personal Level
Let’s move on and consider the third level at which personalisation will impact the competitiveness of premiums. Personalisation relies on three things. Firstly, a lot of data about you – on health, shopping, driving, working, travelling, browsing, to name a few. It also relies on analytics to form all this data into profiles of risk and opportunity, for example about your character and what that means for what the insurer wants. And thirdly, it relies on professional perspectives, about moral hazard and adverse selection.
So the insurer will use this data and analytics to shape an insurance offering for you, framed by what they see to be your character, your personhood. And their marketing will emphasise this. It’s all about you, unencumbered by the problems of others. Against such a backdrop then, what might then be meant by a competitive premium?
How can I judge competitiveness when the premium is based upon the risks and opportunities stemming from my own person? Is my character, in relation to insurance pricing, going to produce a more competitive premium than say that of my brother or sister? Sorry, but financial competitiveness is not part of my relationship with siblings or friends. The underlying basis upon which individualism reduces the insurance pool towards one seems to also disconnect from what the public think of as competitiveness.
There seems to be a hidden fracture underlying the logic of personalisation when applied to insurance. As insurers emphasise the competitiveness that they see it heralding, will consumers become more and more baffled as to what is behind that ‘competitiveness’? And if that is what happens, what does that mean for ‘an effective and competitive market? That after all is the top priority for insurance regulators.
Is the Regulator Ready?
One would imagine that a market trend that could potentially undermine the competitiveness of consumer facing insurance markets like never before, would be of interest to a regulator like the UK’s Financial Conduct Authority. Far from it. In their 2019/20 business plan, the FCA said that they didn’t see personalisation falling within their remit. They did however recognise that it had implications for access and vulnerability, but still, it wasn’t something they were going to devote time to.
What’s behind their thinking then? This they promised to explain, but never have. Perhaps they couldn’t work out why exactly they wanted to ignore the biggest trend in insurance and its obvious implications for fairness, discrimination and competitiveness.
What does this mean for the supervision of insurance markets then? Well, to put it bluntly, it means that initiatives on price walking, on renewal pricing transparency and yes, whole chunks of fairness, become irrelevant. They are initiatives that address the problems from yesterday’s market. The market is moving on and the regulator is being left behind.
And ironically, the regulator is being left behind just when it thought (as per its latest business plan) that it had caught up with the market. The great hope that their CEO has in the potential of supervisory technologies will count for nothing if they just apply it to yesterday’s market.
It’s Not about Resources
The problem here has nothing to do with how well the regulator has equipped itself with supervisory technologies. It has everything to do with the mindset within the regulator in relation to how the market is changing and what that means.
What this lack of foresight points to is a regulator viewing personalisation through a macro economic lens, through a corporate orientated view of outcomes, through a 'big four' lens. What it is again failing to do is view this development through a micro, consumer experience of outcomes. Sure, regulators have to look at the ‘present day ground’ that they are walking over, but unless they also look up and see how the landscape is changing, they risk becoming detached from what consumers are experiencing.
Personally, having been a keen mountaineer, caver and orienteer over the years, the one thing I’ve learnt from experience is that navigation can be everything. If you’re not looking at both the near and far ground, then you’re lost. And I believe the FCA is heading that way.
Am I a Luddite?
Now, some of you might be thinking that I’m in danger of becoming something of a Luddite. Far from it. After an engineering degree, I did a postgraduate degree in what makes science and technology succeed or fail. My thesis was on the interpretation of risk. What this equipped me with is a more structured and critical lens through which to judge ‘tech’ developments.
On joining the insurance market, I did some of the earliest computer modelling of risk patterns on the broking side of the London market. And I went on to co-design one of the biggest and most unusual alternative risk transfer deals of its time. So I’m an embracer of change, of technology, of new pricing models, of new ways of doing things. It’s just that I also look at them with an independent and critical eye.
Personalisation comes in different forms. I think the sector has much to gain from embracing it for customer service. I also think that embracing it for pricing and settlement decisions exposes the sector to reputational dangers. It’s impact on the competitiveness of premiums is just one of those dangers. Fairness, access, vulnerability and discrimination present four other dangers.
What this means then is that insurers need to be critical in how they approach personalisation. Some are grasping this, many others aren’t. With ‘insurtech start-ups’ capturing the innovation narrative, many insurers have gone into reactive mode. Yet the crossroads of markets and technologies tend to be littered with ideas and start-ups that shone bright and then dimmed with scrutiny and foresight.
The irony is that fear of not being competitive could lead insurers down a path that leads to a far from competitive market. The uncritical adoption of market opportunities and complex technologies has lead many a firm up the garden path, and some insurers are in danger of following suite.
Innovations that drive paradigm shifts do not come from reacting to markets. They do not come from 'fear of missing out'. They do not come from technological capabilities or market opportunities. Instead, they come from thinking that is critical and open, unrestrained, diverse and challenging. Insurance needs a lot more of that, in both insurers and regulators.
How Should Insurers Respond?
This may feel rather far in the future, something perhaps to deal with when it becomes more immediate. And some of you will think, why even bother if the regulator isn't interested.
Well, the regulator to watch when it comes to the implications of epistemic fragmentation is not the FCA. The regulatory activity is elsewhere, but still influential for insurers. And a measure of the implications of that activity is how big tech firms are reacting to it. They have recognised the threat to their business and been installing what might be called ‘levers of granularity’.
Insurance may seem rather unique to insurers, but that uniqueness can sometimes swing two ways. It has been used to obtain opt-outs from significant legislation such as on equality. It could however swing the other way, with insurers expected to react more urgently, more decisively, to have grasped an issue rather than wait until it has to be spelt out to them. And I believe that pricing could be one of those areas where that uniqueness ‘swings the other way’.
Insurance executives need to understand the implications that personalisation has for their pricing strategies. They will find those implications interwoven with questions of fairness, competitive and discrimination. If an insurer wants to be trusted, then it has to have executives capable of showing leadership on these implications.
Should insurers follow those big tech firms and start installing ‘levers of granularity’? I think that’s the wrong question. Instead, they need to examine, critically and with more than a little foresight, just where personalisation could take their particular markets. This will help them be ready for that regulatory activity when it starts to wash over them.