In a recent New York Times story, New Gene Test Poses Threat to Insurers, reporter Gina Kolata describes how data transparency and availability are disrupting underwriting for long term care insurance. Kolata discusses how this product, challenged for years by inaccurate claims forecasting and sky-high pricing, faces further threat of adverse selection — as a consequence of innovation.
The article highlights challenges that have potential to impact other insurance lines as well. Carriers should take note.
Data Asymmetry Favors Policy Buyers
Companies like 23andme create data asymmetry between a policy buyer and the carrier, with the advantage flipped from the historical norm where the carrier had the upper hand. With a $199 investment, all of us can now make more informed decisions about which risk pools we may fall into based on the odds, at some point in our lives, of being afflicted by one of 10 diseases covered so far (the Company has regulatory support to expand their offering).
The availability of predictive insights into future medical conditions at an affordable retail price signals that we are entering a world where we will be able to prioritize, with more knowledge than ever before available, where to put our insurance premium dollars. We will have more data to assess which risk pools are worth joining.
This is one more development overturning the business model for life, health and other products. $199 is a good deal when deciding whether to purchase a policy that might cost thousands of dollars in annual premium. The two million people who have already purchased a test kit would likely agree.
The disruption of risk pools as we knew them
Usage-based insurance (UBI) products, such as those offered by Metromile, Progressive and Allstate surface knowledge about an individual that helps the carrier with more precise underwriting, allowing the tailoring of a policy to an individual’s driving behavior. UBI also disrupts traditional risk pool principles. And, it is hard to imagine that UBI won’t negatively affect those with less favorable profiles. The full consequences to society may not be examined or understood until out into the future, but they are brewing.
The 23andme model exploits personalized data, but from the opposite direction. It puts personalized data in the hands of the individual, off limits from the carrier. The power shifts to the individual, and since he is under no obligation to share what he knows, now the carrier faces a greater disadvantage.
Carriers can withdraw from markets, skim the best customers, or advocate for the creation of high-risk pools. Hopefully, the insurance sector will also look itself in the mirror and recommit to its purpose as it relates to making it possible for a community to pool resources to protect individuals in an hour of need. The question is: will insurers find a path to sustain their purpose under rewritten assumptions?
The floodgates demanding reinvention are open. Any insurance player who thinks ‘this too will pass’ or regulations will provide protection may be able to buy time for a while. But chances are his business is already being affected by what data is available to whom and when, by what will be growing data asymmetry working against the traditional insurance model and necessitate a redefinition of how to create and manage risk pools.
Back in the 1990s businesses began to recognize that the World Wide Web would change the way companies across all sectors engaged with everyone — customers, employees, vendors and all of their other constituents. The notion of individuals, not companies, having greater control over what products and services they chose to buy and use was new. For those of us who were at least young adults during the rise of the Internet, the impact of anyone with connectivity gaining access to information via an act as simple as typing a query into the Google search bar took a while to digest.
The insurance sector is a self-confessed laggard when it comes to internalizing and getting out in front of the implications of the Internet. The underlying business model has been relatively stable for a long time. There is evidence of risk pools going back 5000 years, when shippers devised pools to protect against loss of cargo and crew at sea. The sheer complexity of managing an insurance business made it of lower interest to startups, at least until the last couple of years.
Certainly while insurance companies have introduced countless products, brands have come and gone, and distribution, sales, regulation, automation and every other aspect of the business has evolved, the basics have not changed – the creation and management of a risk pool that is sufficiently durable to pay claims over time, and engagement of a broad community of individuals to feel their interests are served by participating.
The time to reimagine is now
Typically over the summer companies on a fiscal calendar year engage in strategic planning processes where leaders take a look out into the future and project the implications of big trends on their long-term financial outlook. It’s a good time to take out a white piece of paper and consider:
- Recommitting to their purpose as players in the insurance ecosystem
- Acknowledge what is different, and how to see threat as opportunity
- Prototype alternative business models, including product, client interaction, distribution, servicing, underwriting and claims management – in other words, the major operating levers of the business
- Engage in serious experimentation to chart paths that are feasible given the changes that are no longer theoretical – they are here.