Will Data Proliferation Foster Insurer/Customer Collaboration on Underwriting?

The Wall Street Journal takes a look at the potential uses of predictive analytics for life insurance underwriting in an article titled "Insurers Test Data Profiles to Identify Risky Clients." The piece characterizes insurers exploration of vast amounts generally available data as an "intensely personal" undertaking. The gist is that insurers may be able to avoid more costly approaches to underwriting, such as those that require medical tests, by developing profiles of people in order to gauge their longevity —'but the insurers methods raise concerns about privacy and security.

In some ways, this is yet another angle whereby one sees a society grappling with the phenomenon of huge amounts of data that can be mined for value. It's another reminder that our society is rapidly evolving in the way it collects and analyzes data, with consequences that are hard to foresee. More and more people are online, whether from home or with a mobile device, and they are sharing more and more information. And the more of life that is conducted or chronicled online, the more people leave a data trail that can be analyzed for fun, profit or mischief.

Many commentators have noted the "death of privacy" or some such concept implied by the unfettered sharing of personal information facilitated by things like online shopping and social media. It seems clear that a new concept of privacy is warranted, and that a new kind of prudence is required to protect one's privacy. At the same time, every society requires some transparency of its members, and those members have the discretion to share things about themselves. In the Information Age, this is creating opportunities for individuals to share information about themselves in order to get something in return. This could simply be sharing one's preferences in order for a retailer to suggest items a customer may like. Or it could be sharing more about oneself in order to get a better rate on one's insurance.

That is the case with the use of telematics for personal automobile insurance, a topic which contributor Fred Blumer explored in our blog yesterday. While the telematics approach wasn't successful at first with American consumers, they now seem to be warming up to the idea. The necessary hardware has become cheaper and people are simply more comfortable with sharing information in the right way for the right reasons.

Perhaps life and health insurance customers may similarly be motivated to enter into a kind of information transparency partnership whereby they enjoy better rates for demonstrating less risky behavior. Ultimately, it's a matter of negotiating with greater transparency.

The thought of insurers, or any other profit-seekers, examining one's private life is disturbing and a bit sinister. The Wall Street Journal piece describes how a life insurer might use data to arrive at different rates for different individuals:

Using readily available data, the consultant said, an insurer could learn that Beth commutes some 45 miles to work, frequently buys fast food, walks for exercise, watches a lot of television, buys weight-loss equipment and has "foreclosure/bankruptcy indicators," according to slides used in the presentation.

"Sarah," on the other hand, commutes just a mile to work, runs, bikes, plays tennis and does aerobics. She eats healthy food, watches little TV and travels abroad. She is an "urban single" with a premium bank card and "good financial indicators."

Deloitte's approach, the consultant said, indicates Sarah appears to fall into a healthier risk category. Beth seems to be a candidate for a group with worse-than-average predicted mortality. The top five reasons: "Long commute. Poor financial indicators. Purchases tied to obesity indicators. Lack of exercise. High television consumption indicators."

In today's political atmosphere, one can imagine the complaint that Sarah is being treated unfairly. However, leaving aside the privacy question for a moment if the underwriter is using reliable information appropriately, Sarah is simply getting a realistic rate.

The point is that more information, used properly, will result in more mathematically sound, i.e., better, fairer underwriting for both the insured and the insurer. In theory, it should be a good thing for both parties to be able to agree on more transparent transactions.

This new kind of data-driven transactional environment could also provide the incentive for individuals to act more virtuously. Doing whatever one feels may give one a sweet sense of freedom, but it's probably not a bad thing if I'm a little bit more conscious about how close I follow the other car, how frequently and suddenly I brake, or how much I exercise and how well I eat.

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio