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New data analytics are paving the way to a new era of personalized insurance.
Tony Dardis, Consulting Actuary, Milliman.
The personalized insurance journey is not just about enabling insurers to take advantage of more sophisticated risk analysis and become more efficient in their underwriting and pricing. It is about creating powerful incentives for people to improve their lifestyles.
“The potential rewards of personalization will not be reaped by richer data alone,” says Francois Millard, Senior Vice President and Chief Actuarial Officer of Vitality Group, a member of South Africa-based Discovery Holdings, and a global pioneer in personalized insurance.
“Critical in our model are rich consumer experiences and incentives. These are essential to driving changes in behavior.”
Vitality started breaking the mold of traditional insurance in South Africa in 1997 and now works in partnership with other insurers to develop that approach globally. In the United States it has developed new life insurance products in partnership with John Hancock and in the UK it initially partnered with Prudential to create a very successful health insurance product. It has since expanded to more than 15 countries.
The concept behind Vitality’s approach is its Shared Value Insurance model. The aim is to change consumer lifestyle behavior with the win-win strategy of potential lower costs for policyholders and better managed risks for insurers.
The incentives include discounted gym memberships and access to health checkups right through to using the latest connected technologies to offer further premium discounts for hitting monitored activity targets.
One of the concerns around personalized insurance is that it might lead to the emergence of an insurance underclass, who could find it impossible to get insurance as more and more individualized data becomes available to underwriters.
Millard counters these concerns, saying: “We hope that personalized insurance will make it more affordable and more attractive to people. As individuals, we often have good intentions but we deviate from them. Our approach creates powerful incentives for people to stick with healthier lifestyle choices.”
Proof that by improving lifestyles more people will get access to affordable insurance is seen in the Vitality partnership with John Hancock and the American Diabetes Association.
Millard points out: “Diabetics have traditionally been rated or declined but by helping change their behavior we can widen the choice for them. There are very significant differences in mortality depending on the way they manage their conditions. If people can improve their compliance with an optimum way of managing their diabetes we can offer them more affordable products.”
Shared Value Insurance concept
Developing personalized insurance with new business is clearly an attractive proposition but some of the really big gains for insurers are to be found by applying the shared value concept to business already on the books.
There are three ways of improving the financial performance of in-force business: reduce mortality, improve persistency and lapse ratios, and cut expenses.
“As an industry, we have done an incredible amount of work around persistency and expenses. We believe that there are great, and so far untapped, opportunities to do something around mortality,” Millard says.
The key is to get the attention of policyholders and then create a closer relationship with multiple touch points over the year. This is not easy, acknowledges Millard, but eye-catching offers of Fitbits or significant discounts on Apple watches have been shown to work. These offers can be applied intelligently to existing business to see where they could have the most impact.
“You are going to want to prioritize the groups where there are going to be the best returns. In a long-term care book, for instance, the priority could be to find appropriate interventions and incentives for older people who might be near to claiming,” he adds.
Visibility of information
With technology enabling the time and cost of the proposal and underwriting processes to be slashed, there are further big prizes to be won by getting policyholders to share their electronic health records. But that has to be part of a two-way relationship.
Millard explains: “It cannot be about insurance companies having more information. We must also improve transparency and enable people to have visibility on how their own information is being used and how they could change their behavior to improve their risk and get lower premiums.”
The need for insurers to develop a new type of relationship with policyholders is vital and trust will be a big part of that. People will ask if their data is going to be used against them and the industry has to be able to address the question. People need to see that they will get some sort of value out of providing their data. Trust will also be a critical part of navigating the regulatory and ethical issues that naturally arise from insurers’ increased use of policyholder information.
The Vitality approach addresses many of the concerns about personalization. When Vitality first teamed up with John Hancock it realized up front that there were going to be problems if it tried to bring lifestyle in as an underwriting factor.
The model works by charging a base level premium and then giving people the option of qualifying for discounts for lifestyle options. The base level premium is still a competitive premium because they want to be a player in the wider market.
As insurtech gathers momentum the journey toward personalized insurance will accelerate.
The use of apps to collect more data will increase the opportunities, and the development of pay-as-you-go underwriting solutions could enable insurers to offer further incentivized discounts.
The industry must be alert for the challenges that lie ahead on this road, however.
There are areas where we still need to look at the implications. Annuities is an obvious area. What about people with healthy lifestyles who will live longer?
These questions are complex, but the opportunities are tremendous. The journey has started in earnest with a clear focus on the wider benefits of personalization.
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