Are we seeing the start of a ‘retreat from insurance’?

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, 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: 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 buy loss prevention advice from insurers and brokers to make sure that the risk 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: for example, you might get a small discount for being a member of the local neighbourhood watch, or for 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, then two things happen: firstly, they stop being insurers, and secondly, market capacity falls, making it harder for consumers to find 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.

I’ll be a panel speaker at a Financial Times conference later this month, discussing why insurers are distancing themselves from longevity risk. So it’s not only me, but the UK’s main business newspaper who is asking these types of questions. I’ll let you know what two leading insurers on the panel say in reply.

In the meantime, the questions to keep in mind are: why move from your core business, and how do you manage that? Has big data turned the ‘insurable public’ from risks that have been successfully insured for a hundred years or more, into a myriad of good and bad risks that must be sorted at all costs? Is this fuelling a new mindset that says that if a personalised risk profile is not to the insurer’s liking, then some loss prevention services can be offered instead, to maintain engagement with that consumer, as well as access to their data. As personalisation generates increasing polarisation, the market for such loss prevention services will unfortunately grow. The passport out of it will depend on accepting the health and home monitoring devices that stream data to the insurer, telling them when you’ve about to become an ‘insurable risk’.

The disrupters talk about this move to insurers becoming lifestyle companies as bringing them closer to customers. It sounds good, but in fact, their focus should be on giving consumers reasons to get closer to the insurer. The difference between the two is trust.