THERE are more web-connected devices than people in the world. Smartphones, fitness armbands, cars, factories and even domestic appliances churn out a constant stream of live data. Cheap sensors and the tsunami of information they generate can improve our lives; black boxes in cars can tell us how to drive more carefully and wearable devices (like the forthcoming Apple Watch) will nudge us toward healthier lifestyles. Yet while consumers and surgeons general may welcome such developments, they pose an existential threat to some insurers. How might data-gathering devices spell doom for parts of the insurance business?
Insurance relies on a dynamic of imperfect information. Individuals are at greater or lesser risk of all sorts of ills, from car accidents to cancer. But because those at lowest personal risk of trouble are not always aware of their good fortune, they seek insurance against trouble alongside those with greater propensities to fall seriously ill or face other hardships. Unlucky and lucky alike pool premiums into a collective fund, and the unused payments of the fortunate cover the costs of the unfortunate, leaving some money left over as insurer profits. But the uncertainty that underpins the need for insurance is now shrinking thanks to better insights into individual risks. The growing mountain of personal data available to individuals and, crucially, to firms is giving those with the necessary processing power the ability to distinguish between low-risk and high-risk individuals (and those in between). Thanks to technological innovation, sensors that monitor our every move are becoming cheaper, cleverer and more ubiquitous.
This could upend existing insurance business models, in a few ways. The better behaviour resulting from smart devices is one threat. Conventional risk pools (for home or car insurance, for example) are shrinking as preventable accidents decline, leaving the slow-footed giants of the industry at risk. Business is instead moving to digital-native insurers, many of which are offering low premiums to those willing to collect and share their data. Yet the biggest winners could be tech companies rather than the firms that now dominate the industry. Insurance is increasingly reliant on the use of technology to change behaviour; firms act as helicopter parents to policyholders, warning of impending harm—slow down; reduce your sugar intake; call the plumber—the better to reduce unnecessary payouts. Yet this sort of “Big Mother” relationship relies on trust, and the Googles and Apples of the world, on which consumers rely day-by-day and hour-by-hour, may be best placed to win this business. Most tech giants are now rushing to build health platforms. It doesn’t take a leap of imagination to envisage this approach extending to monitoring of homes, automobiles, and much else besides.
Whether technology companies are actually keen to get into the insurance business is not yet clear. The prize for the most successful firms will probably be huge; last year insurers collected an estimated $338 billion in profits. But the industry will also face intense regulatory scrutiny, as governments seek to make sure that the misfortunes of bad genes or bad luck do not leave some individuals uninsurable and bankrupt. And as the financial crisis reminded us, good but limited data and powerful algorithms still leave plenty of room for the disastrous accumulation of risk. There are some dangers against which even the Apple Watch cannot protect us.
Insurers are becoming behavioural engineers (March 2015)
Separating bad behaviour from bad genes is no easy feat (March 2015)