Insurance has always been about the consumption of data. This data can be used to assess the nature of a risk so a price can be associated with a specific type of protection against a potential resulting loss. Gathering data, converting it into actionable information, and translating that into a specific outcome has historically required specialized tools and skills, favoring enterprises (or groups) over individuals in the analysis of the data and the execution on a response.
Underlying the traditional pricing of risk was the notion that the attributes of a group could be looked at in totality. Assessments about the group, which had no specific, special knowledge, would allow coverage that, on average, would provide appropriate pricing flexibility to absorb the inevitable variability that emerges in the short term. Over time, the “group” nature of insurance spreads the risk and allows actuaries to sleep at night.
Access to better and more refined information has had some profound impacts on the industry. In commercial lines P/C, for example, there had been great discussions in some carriers around the notion of whether underwriting is an art or a science. While some carriers pursued the former, those that chose that latter found that they were able to process certain business much more quickly (i.e., the clean risks). This meant that the residual pool the “artists” of the profession evaluated has profoundly shifted, with the average of that segment no longer matching what had been true for the original pool at large. Suddenly, this appeared to be a form of self-inflicted adverse selection, with predictable implications for profitability. The point here, of course, is that this was about decisions that carriers made internally, and that the profitability, or lack thereof, was driven using better tools and analytical capabilities by competing carriers. After all, analytics is an arms race.
But what would happen if it didn’t stop there? In effect, if the ability to take data and translate it into actionable information passed from carriers to individuals, what could happen?
This has gone from a theoretical conversation into something that is a potential reality for life and health carriers as the ability to do targeted DNA testing has advanced rapidly in recent years. Last year, with the advent of DNA testing that allowed individuals to assess the probabilities for inheriting Alzheimer’s disease, the possibility that buying patterns would be influenced by information that was exclusively available to the insured became real. Now, for a specific product (i.e., LTC coverage), the potential for adverse selection driven by information/technology appears to be a real possibility. There are many positive implications from this, of course, including the potential to help develop more effective and targeted treatments in the future, but a reality is that it could have implications for insurance carriers.
This week, news emerged that 23andme has perfected testing that has been granted FDA approval for a similar assessment of certain types of breast cancer gene mutations. It is an initial test for very specific conditions which could have a range of significant and positive outcomes for individuals impacted by this disease. It also demonstrates, if there were ever any doubts, that this science is moving forward quickly and has the potential for additional, broader implications for the insurance industry in the future. In fact, this is yet another example, noted by William Gibson, of how the future is already here, but it isn’t evenly distributed.
How will carriers respond when the acquirer of coverage has more and/or better information that the carrier? Certainly this is not a completely new phenomenon, but with new advances in capabilities, this may not be an issue to which carriers can long avoid giving careful consideration.
Also, of interest is the degree that companies in specific industries need to increasingly think of themselves as technology companies. Our recent Innovation Tour to Silicon Valley, which took us past the 23andme headquarters, provides some fascinating items for senior IT leaders at insurance carriers to consider as transformation comes to center stage.