{"id":19924,"date":"2016-11-18T17:45:30","date_gmt":"2016-11-18T22:45:30","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/digitization-threatens-the-insurance-business\/"},"modified":"2016-11-18T17:45:30","modified_gmt":"2016-11-18T22:45:30","slug":"digitization-threatens-the-insurance-business","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/digitization-threatens-the-insurance-business\/","title":{"rendered":"Digitization threatens the insurance business"},"content":{"rendered":"

Insurance at a glance<\/strong><\/p>\n

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. \u00a0Since its creation in the 17th century, insurers have sought to amass lots of policies in each class of risk they cover.[1] They do so not only to make money, but also to be safer. This is the law of large numbers. Insurers don\u2019t know exactly where risks lie.<\/p>\n

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. [2]<\/p>\n

Technology threat<\/strong><\/p>\n

Technological innovations\u00a0could upend existing insurance business models, in a few ways. Two worries stand out. One is a fear that insurers will go from being companies you hope never to deal with to ones that watch your every move. The other problem is that insurers will cherry-pick the good risks, leaving some people without a safety net or to be dumped on the state. The better behaviour resulting from smart devices is another\u00a0threat. 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\u2014slow down; reduce your sugar intake; call the plumber\u2014the better to reduce unnecessary payouts. Most tech giants are now rushing to build health platforms. It doesn\u2019t take a leap of imagination to envisage this approach extending to monitoring of homes, automobiles, and much else besides.<\/p>\n

Insurance\u00a0industry reactions<\/strong><\/p>\n

Modern technology enables insurers to gauge individual risk much more precisely. Monitoring devices provide a wealth of data, as do social media, credit-card histories and other digital records. A pilot scheme in America from Aviva, a British insurer which has since sold its American business, found that analysis of a potential customer\u2019s less conventional data, such as online behaviour and spending habits, was as effective in identifying potential health risks as a medical examination including blood and urine tests.<\/p>\n

In a similar vein, Michal Kosinski of Stanford University and colleagues at Cambridge University recently found that computers which are fed a person\u2019s Facebook \u201clikes\u201d are better than a human analyst at predicting whether they smoke or take drugs. Liking \u201cBig Momma\u201d films, a series of comedies in which a detective disguises himself as a fat, flatulent grandmother, is correlated with drug use; a love of curly french fries is a strong indicator of intelligence; fans of Honda are unlikely to smoke. [3] Such prying is just the beginning: insurers speak with straight faces about a time when sensors in customers\u2019 homes will alert plumbers to weak pipes before they burst, and glucose meters in contact lenses will keep a record of how healthily they are eating.<\/p>\n

All of which calls into question the basic logic of the insurance industry\u2014that it is impossible to predict who will be hit by what misfortune when, and that people should therefore pool their risks. \u201cCherry-picking\u201d low-risk customers and spurning those who will prove liabilities is becoming much easier. In the process, insurers may transform themselves from distant, cheque-writing uncles into ever-present and interfering helicopter parents. The prize for the nimblest will be huge: the industry manages more than $30 trillion, nearly as much as the $36 trillion held by pension funds; last year it made $338 billion in profits. [4]<\/p>\n

(796 words)<\/p>\n

Sources:<\/p>\n

    \n
  1. The Economist, “How technology threatens the insurance business”,\u00a0Mar 16th 2015<\/li>\n
  2. The Economist, “Risk and reward”,\u00a0Mar 14th 2015<\/li>\n
  3. Financial Times, “Insurance sector worried as insurtech start-ups cosy up to customers”,\u00a0Oct 14th, 2016<\/li>\n
  4. The Economist, “A tricky business”,\u00a0Mar 14th 2015<\/li>\n<\/ol>\n","protected":false},"excerpt":{"rendered":"

    THERE are more web-connected devices than people in the world. Yet while consumers and surgeons generally may welcome such developments, they pose an existential threat to some insurers. 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