Destructive demand: Is it happening in insurance underwriting now?

Destructive demand emerges every so often to undermine the reputation of insurance. In UK motor insurance, it emerged in the market for referral fees, but also led to such business being banned. Could it be happening again with underwriting data?

Destructive demand occurs when behaviours in a secondary market like that for referral fees undermines behaviours in a primary market like that for motor insurance. The behaviours of motor claims operations changed in order to exploit opportunities for referral fees, even when it was not in the long term interests of insurers to do so. Referral fees brought in lots of new revenue, but also raised third party claims costs and damaged the trust that the motoring public had in insurance.

Its Latest Incarnation

The latest incarnation of destructive demand is now surfacing in underwriting. Insurers are recognising just how valuable the data they collect is. And there’s a rapidly expanding market for such data, with data brokers keen to exploit their existing relationships with insurers. So what emerges is a secondary market in data that is seeking to ‘pull’ more data out of a primary market in insurance.

And insurance is a particularly good market for this, with its lifestyle approach to underwriting allowing insurers to tap into all sorts of ‘risk’ data. Declarations frame consent in very generic terms, so facilitating all sorts of secondary use.

I’ve experienced it myself, when seeking a household quote. Some of the questions were entirely unrelated to the risk at hand. When the firm couldn’t explain why they needed to know this, the saving their quote represented didn’t outweigh the loss of trust their approach engendered.

Do Privacy Laws Help?

You might think that privacy laws limit what insurers can do with your personal data. They do, but not as much as you think. Of course personal information is extracted, but not too much, otherwise the data’s value is eroded. Enough is left in to allow its integration with the data broker’s other sources, and the manufacturing of re-imagined identities for those affected. Enough for a significant correlation to be generated.

The great danger with destructive demand occurs when ethical standards in the secondary market are less than what the primary market should be upholding. That’s clearly the case with underwriting data. What happens is that the secondary market exerts an influence on its primary market suppliers to adopt their lower standards.

And as a result, a culture emerges in the primary market that is less sensitive to ethical corners being cut. Questionable practices go unchallenged. You hear remarks like ‘everyone else is doing it’ and ‘who will be worse off anyway’. Both are signs of people making bad decisions.

Referral fees were bad for insurance reputations. How insurers exploit customer data could be just as bad, perhaps more so. Insurers need to think about this carefully, before the damage is done.