Big data drives insurers to pick lower-risk clients

In the same way that telematics has started to change the motor insurance business, a rise of technological devices allowing precise data-gathering on the habits and lifestyles of individuals has the potential to revolutionise some personal lines businesses such as life insurance, term life and occupational disability insurance.

Using an array of devices including heat, pressure or tracking sensors combined with wearables that can measure your heartbeat, among other things, this new wave of technology is developing into a game-changer for the insurance industry.

Insurers are developing data-driven products that offer reduced rates to lower-risk clients and help driving business risk down. At the same time, higher-risk clients are likely to have to pay more and may, in a worst-case scenario, face difficulties in getting insured.

“The use of sensor technology and wearables will be a big theme over the next three to four years,” says Jonathan Howe, UK insurance leader at PwC. The collected data from corporate and individual clients will allow for a more accurate risk assessment and pricing, he explains.

ITALY LEADS THE WAY

Among the companies taking the plunge and very much at the forefront of embracing this change is Generali. In July, the Italian insurer launched Generali Vitality in Germany with a view of expanding elsewhere in mainland Europe.

The plan offers between 5 percent and 10 percent lower rates in term life and occupational disability insurance policies to clients who make available data that proves that they are engaging in a healthy lifestyle. Members can, for example, improve their status through sports activities, regular medical check-ups, quitting smoking or having a healthy diet.

The company is also developing a similar product for health insurance clients. Diabetes, hypertension and cardiovascular diseases and some forms of cancer can be partly attributed to a poor lifestyle and are decisive drivers for a high mortality rate as well as a high degree of illnesses in the population, explains Gianpaolo Meloncelli, Generali’s group strategy & business development director.

He says studies show that medical costs for customers participating in the Vitality programme are about 10 percent lower than for those who do not use Vitality.

Such an insurance plan is likely to attract younger, more active and therefore healthier clients, reducing claims volumes and potentially increasing the insurer’s profitability.

PROVEN TECHNOLOGY

The Vitality programme has been tested in other countries such as South Africa and the UK by South Africa-based insurer Discovery. According to data made available by the company, risk-adjusted hospital costs for engaged Vitality members with non-chronic conditions are up to 40 percent lower than for non-engaged members.

For members with chronic conditions it is up to 30 percent lower. Similarly, admission rates to hospitals, length of stay and hospital costs per patient are lower than for non-engaged members.

“Besides health, every single insurance class can take benefit from the new technology and data analytics,” Meloncelli says.

One of the leading areas of business in this respect was motor insurance. Through the application of telematics, devices that track driving behaviour, insurers are able to reward lower risk drivers by reducing their rates while motivating them to become even safer in their behaviour.

“Data allows you to continuously select the best drivers,” says Nick Corrie, CEO of Trak Global, a telematics specialist and motor insurance provider.

“Our accident frequency is about 40 percent lower than an equivalent book of equivalent age and that translates into indemnity savings.”

Trak Global assesses clients’ risk rating by measuring how much they drive, which roads they drive, how they drive relative to the speed limit and how they drive compared to the average speed on those roads, Corrie explains.

“We’ve got data from tens of thousands of cars and test it over time against claims rates and adjust it to make it more and more predictive,” he says.

Telematics-based motor insurance policies can offer savings of up to 25 percent for careful drivers and the number of such polices has grown by 40 percent year over year as of December 2015 to almost 455,000, according to the British Insurance Brokers’ Association.

These data-driven policies are particularly popular with less-experienced young drivers because their motor insurance is usually more expensive and they generally have less money, Corrie says. The amount of money younger people get back as reward for safe driving and the reduced premium make it an attractive proposition for them, he notes.

This type of insurance is less popular with older people because their rates are generally lower, so the discount would not make such a big difference. In addition, older drivers are less likely to change their behaviour for £60, Corrie explains.

“For older people it’s less to do with money. You have to be more creative around the marketing proposition to get higher levels of engagement,” he says. Also, the cost of gathering data would have to be reduced to make it succeed—it could be done via smart phones rather than boxes, he suggested. “It is possible to make it work,” he notes.

DATA-DRIVEN PROFITS

Data-driven motor insurance is attractive for providers because it is “more profitable,” Corrie says. “If you use the data better, those who produce the most engaging customer proposition, and those who manage to collect it in the most cost-effective way, will gain more market share,” he notes.

However, technology is not the main driver for success in this type of motor insurances. “We’ve learned that it isn’t about technology, it’s about how people interact with technology. The way we chose to make that understood was by creating our own insurance distribution brand so that we could engage with customers and understand what they like and what they didn’t like,” Corrie explains.

Home insurance may be the next segment to be reshaped by data-driven products. It could start with the introduction of sensors to home boilers, Howe suggests. “If the boiler would be at risk of overheating, the insurance company could automatically turn the boiler off. You might be able to do the same around leaking pipes and pressure in radiators,” he says.

The availability of data is not only driving personal insurance products. “The use of technology is across the board. We’re seeing for example companies trying to put tracking sensors in shipping containers. Apparently they fall off boats all the time, get lost in transport, or people don’t know where they are. We are seeing insurance companies experimenting in using drones to monitor status of oil pipelines or crop fields or mines, either to check their status or after an incident to try to assess the damage,” Howe says.

Not only are data-driven products more attractive for lower-risk clients, financial rewards are also motivating them to further reduce their risk. It is all about preventing certain type of “bad events” from happening, Generali’s Meloncelli says.

“This is true for life-related risk as well as for non-life products such as car and home-insurance,” he explains.

The rising availability of data to assess risk is likely to lead to an expansion of the insurance industry’s business model to include prevention activities.

“It helps insurers to move away from just giving financial compensation for an event to actually being able to prevent an event from happening,” Howe says. “Insurers will become much more relevant to their retail and business customers,” he notes.

The trend towards data-driven insurance products is also likely to create some controversy in society. “The basis of insurance is people pooling together and sharing risk. If you can become very specific, and price everyone individually, then people with a higher risk will have to pay a lot more,” Howe says.

DEFINED BY DATA OR DISCRIMINATION?

High-risk clients defined by data could have a similar fate as flood-threatened dwellers in the UK. Insurance rates for people living near rivers went up to very high levels and they were arguably seen as uninsurable. The government had to step in to found Flood Re together with the industry to ensure that prices for cover were kept at reasonable levels.

A segment where data-driven products may become particularly controversial is life insurance. “People do worry that monitoring around health and life insurance might result in people with a genetic tendency to have a certain disease finding it harder to get insurance,” Howe says.

In other fields such as motor insurance or home insurance, data-driven discrimination is more acceptable because a change in behaviour or the introduction of safety measures can improve the insured’s risk profile. But to allow this to happen, policyholders will have to hand over a lot of personal data.

“It will be a big trend over the next few years,” Howe says. To comply with privacy regulation, insurers will need clients to consent to the way their data is being used. “Research shows that consumers will consent as long as they get something in return,” Howe notes.

He thinks that data regulation may even help the transformation of the insurance industry. “By being very clear with consumers, insurers can actually do a commercial deal,” he says.