Innovation in Insurance – Personalised pricing and the risk to pooled risk

I was on a panel session at the Benefex Client Winter Forum recently and was asked what I thought the biggest technology driven changes in financial services would be and how they would impact employers and the services they provide their staff. While everything about the world around us is changing at pace, there was one area in particular which stuck out like a sore thumb. Insurance.

In the workplace context, insurance is vital to most benefits packages. Life cover is standard, and health and critical illness cover are also increasingly popular enhancements for staff. Additionally, while pensions saving has moved towards defined contributions, there is still a key insurance contract for most people in the annuity that we buy when we retire.

There is change afoot however, in the way insurance is sold and priced, which could have a profound impact on employers and employees alike.

GATHERING INDIVIDUAL DATA

The amount of data available about individuals (and by extension, society as a whole) has exploded in recent years and the more recent additions of wearables, connected homes and increased mobile usage have taken us to a point where, for most people, there is a wealth of data ready to be mobilised by firms.

On a day to day basis, we see this data being put to good use. Our shopping experiences are tailored based on what retailers know about us. Our web searches are focussed in on our location to make the results more relevant. Our email accounts strip content to create reminders for events and travel plans to stop us missing important dates.

Insurance providers of all types are now trying to make use of this data in order to provide more competitive and accurate pricing for customers. The basic principle is that with more data known about someone, the pricing can become more specific and tailored, reducing the risk and ultimately ending up with a keener price for both the client and the insurer. It also has the associated benefit of reducing the likelihood of non-disclosure and policy fraud. Or at least, that’s the idea.

For insurance providers, this is really the continuation of a trend.

POOLED RISK

All traditional insurance business is based on the principle of pooled risk. When you take out life insurance, for example, you are becoming one of a group of people with the same policy. The insurance company has made a series of assumptions about your group. They think some people will die earlier than you will, and some people will die later than you will.

They calculate what they believe to be the likelihood across the book of business, and price the policies within this book to reflect those assumptions, and a bit of profit of course. Up until recently, the way insurance companies looked to derisk themselves from the unknown was to shrink the size of the pool and to manage multiple pools to balance risks across well understood books of business.

  • I’ll only insure drivers over 55, and younger than 75, because I can obtain a range of data sets which show that, historically, that group has been safer drivers than the average.
  • I’ll only offer this annuity to people who have recovered from critical illnesses because I can make some firm assumptions about their longevity.

INDIVIDUAL ASSESSMENT

Now though, with the prevalence of data, insurers are looking to move away from traditional pooled risk groups, and instead assess risk on an individual basis. On the surface this might appear to be a positive step. Car insurance is a nice example. Drivers are in control of their speed and driving style, so it seems reasonable to assess them as an individual and price accordingly based on real time data. Better drivers get cheaper policies and vice versa.

Applying the same principles to life insurance and health cover is a much thornier issue though, and there is a high risk that large sections of the population would essentially become uninsurable as a result of these developments. On an individual level this is obviously worrying and could lead to a number of challenges, but for employers, there is an added layer of complexity.

While many firms are used to dealing with renegotiating and quoting for workplace cover policies, I’m pretty sure very few have thought through how to handle the case where a high percentage of your staff can’t get health or life cover. In order to manage this, employers are likely to need to think of strategies which allow them to collect data on their workforces, via connected devices and fitness trackers.

This data would have to be anonymised (especially with GDPR around the corner) but will provide employers with a way of proving a general level of fitness for their workforce. In a few years, it is likely that this is the only way an employer will be able to get a reasonable workplace policy without it being prohibitively expensive.

 

This blog was originally published on the Benefex Blog here

Buzzword Buster – Insuretech

A subset of Fintech, InsureTech is a broad term to cover a range of tech start-ups and innovation within the insurance industry. There are a few genuinely innovative ideas in this space which cover some interesting key themes such as the personalisation of pricing, the reestablishment of mutual businesses, peer-to-peer and community initiatives and the use of smart contracts in the claims process.

In addition to these interesting ideas, here are also a huge number of tech firms who are essentially just doing good old fashioned insurance brokerage in a slightly different way to those before them. It is unlikely that many of these players will make a lasting impact on the industry.

 

Disagree or want to add something? What does Insuretech mean to you?