Before my yoga-practicing daughter berates me, it’s a tongue-in-cheek headline, but it’s also a headline born out of the emerging trend in life and health insurance to encourage and motivate policyholders to lead a more active life. This stems from the fundamental problem insurers have in this market: to rate the risk you’re seeking to cover, they require a lot of data; policyholders fill out extensive questionnaires asking for personal data, family histories and suchlike (I’ll come back to personal data in a moment).
Prospective policyholders also often submit themselves to expert examination. All of this information is fed into complex actuarial models that seek to normalize the specific variables of the assessed. Using comparable data collected over large samples of the population, and with decades of history, the result is a statistical assessment of the risk of a life-threatening illness or being knocked down by the proverbial bus. But here’s the problem: this is a static, point-in-time data model. Like a balance sheet in the annual report, it’s a snapshot view of the state of the individual. Unlike the balance sheet analogy, the insurer doesn’t have the equivalent of a CFO updating the balance sheet on a regular basis, so the insurer isn’t able to reassess the changing risk profile over the term of the policy.
Of course, this is a lifestyle change that works in both directions. What if I used to spend all my time on the sofa, eating pizza and watching Jeremy Kyle on TV? (No judgment or offense intended – just illustrating a point!) And then I changed my behavior and started to go to Body Combat and Spin classes three times a week. As a result, I lose 20 pounds, eat better, sleep better and have changed the basis on which my cover could be rated. I’m not obliged to disclose this ‘material’ fact to my insurer either!
And this is the issue with pricing for life and health cover. It’s all based on static data at a single point in time. Once the price point is set, this is the baseline for the full term, or every renewal. It’s a one-size-fits-all approach. While it may be driven by complex actuarial models to achieve a high degree of granularity, the underlying principle of how the cover is priced remains the same. The premium I pay has more to do with the life expectancy and general health and well-being of every other male in their 50s than it does with my actual lifestyle, attitudes and changing behavior. Yet, times are a-changing!
Wearables insurance – tracking blood glucose levels
The adoption of wearables tech by insurers is growing. A 2014 survey by Strategy Meets Action (SMA), a Boston-based research firm, found that 22% of insurers are developing a strategy for wearables. Ironically, the same survey also reported that only 3% of these insurers actually wore a wearable device themselves!
(By the way, when I talk about wearables in this article, I mean the collective name for miniature electronic devices that are worn on the body in some way to track health and lifestyle information. Well-known wearables include Fitbit, Jawbone, and of course the Apple Watch. Wearables also include such technology as Google Glass or Golden-I, but their application in the claims process is a subject for another day.)
In the US, estimates vary around the 10% mark of all Americans who wear a fitness tracker, though this is going to rise dramatically in the coming years. The widespread adoption of sensors that track more than just fitness will also explode. Sensors that monitor breathing, heart rate, stress levels and the onset of chronic illness will all add to the current generation of fitness trackers that count steps and sleep patterns. The big one is the pursuit of blood glucose monitoring, as this is the link to an individual’s diet and eating behavior, which has a greater impact on health than simply measuring activity.
Already, employers (and particularly the self-insured corporations) are buying wearables in large quantities to give to employees to track and encourage them to lead a healthier lifestyle (thereby reducing the potential cost claims burden from absenteeism and ill health).
When you look at its work, it has put a lot of resource into programs that educate on the benefits of healthy diets and a healthy lifestyle, for the good of the individual as well as for the insurer or employer. To me, this defines corporate social responsibility far better than any go-green policy or carbon footprint reductions. Vitality has gone further than simply integrating wearables. Its relationship with the network of gyms enables it to track when policyholders go to one of them from the swipe of their membership card. Through its mobile app on the smartphone, it can track how long you’ve stayed there. And it’s not just going to the gym that earns reward points, as playing a round of golf also counts towards the overall reward points tally.
Millennials and the privacy debate
The reason this model works is because there are clear benefits to both parties. It’s a win-win with significant social consequences. The policyholder is healthier and spends less because of lower future premiums and rewards, while the insurer spends less by reducing the overall cost of claims. However, there’s a price to be paid for this advance in mobile and wearable tech in the insurance industry, and this is in the area of data privacy.
To work, the policyholder must be willing to share data continuously with the insurer. This data will come from multiple sources, and not always at the explicit request of the insured. When Vitality first launched the pedometer, the insured would physically connect the pedometer to a computer via a USB cable. The policyholder knew what they were doing. Today, there are no cables required. Whether the insured is swiping their gym membership card, Bluetoothing their Fitbit or simply carrying their mobile in their pocket, the insurer is continuously collecting data on them.
Having said all of this, the fact is that the wearable insurance model is still at a rudimentary stage in its evolution. The data collected is assessed and aggregated, but only to create a points system. These points are simply exchanged for a future discount or rebate on the policy in the form of Amazon gift vouchers. The underlying underwriting process hasn’t changed!
So, this may not yet be the giant leap for mankind, but it is certainly one small step towards the nirvana of personalized and dynamic premiums, where premiums will adjust over the term of the policy to reflect a policyholder’s efforts to reduce the risk of ill health or a chronic illness on an ongoing basis. To do this requires a seismic shift in the approach to underwriting risk, and represents one of the biggest areas for disruption in the insurance industry.
When this happens, I will be able to take my personal data collected across multiple sources, aggregate it on Nudge, and upload this data to an underwriting marketplace, where insurers will bid for my cover based on my profile. And I will be healthier and wealthier as a result!
– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. You can read the original article here.