Life insurance companies used to sell policies to people to protect their families if they died young. Increasingly, they sell policies that offer people an incentive to be healthy.
It sounds more appealing and it seems to work ‚ÄĒ a study using data from 400,000 people found that they exercised more in return for benefits such as lower premiums. It is part of a shift to the personalisation of insurance through technology, offering preferable terms to less risky customers.
But is a personal life policy really an insurance policy or something else ‚ÄĒ a bespoke service similar to private medical care and gym membership? That does not matter as long as it works, some will say, but the question is vital for the future of insurance in a world of digital and genetic technology.
The principle of pooling the longevity risks of individuals to offer peace of mind and financial security reaches back to the annuities table published by Edmond Halley in 1693, based on births and deaths in Breslau. It was often known as assurance ‚ÄĒ the promise that people could ease their worries by obtaining a guarantee of equal financial treatment with their peers.
This culminated in the modern life insurer, which offers risk reduction and guarantee products such as annuities ‚ÄĒ which promise to pay policyholders a fixed income no matter how long they live. They are often sold over the phone or in person by sales forces.
The traditional business is now in decline. As interest rates have fallen and remained very low, some insurers have struggled to make high enough returns to support their annuities. Some are selling portfolios of old-style products to private equity funds, and moving from insurance into asset management.
Those who persevere with life and health insurance are using technology to manage risk better. Hence last week‚Äôs study commissioned by Vitality Insurance, a venture started in South Africa to link premiums to exercise ‚ÄĒ the fitter the customers, the less they will pay. It has spread around the world and the US insurer John Hancock is using it for all life policies.
Technology makes it easier to assess individual health; the Vitality study looked at policyholders using Apple Watches to monitor exercise. It turns out that aversion to loss, a core human instinct, motivates people to exercise if that will reduce the price of an expensive watch. It also makes them healthier, reducing the likelihood that they will claim on their life or health policies.
Leading a healthy life by exercising and eating well is one way to reduce mortality risk. The other is to have good genes, and be less likely to suffer from cancer, heart attacks or other illnesses. Personal genetic testing to identify higher risks of developing diseases such as Alzheimer‚Äôs and Parkinson‚Äôs is now cheap and widely available through companies such as 23andMe.
The difference between lifestyle and genes is that, for now at least, one cannot change the latter. Some governments bar insurance companies from using genetic testing to stop people at higher risk of diseases from taking out life and health policies on equal terms with others. UK insurers have agreed a code under which they cannot require people to take genetic tests.
These are early days for personalised insurance and Adrian Gore, chief executive of Vitality‚Äôs parent Discovery Limited, says there is ‚Äúshared value‚ÄĚ in maintaining large risk pools while giving people incentives to move from higher to lower risk categories. Insurers gain not only healthier but more engaged customers ‚ÄĒ the Apple Watches provide a constant link.
But once technology exists, it is hard to limit its use. Insurers face a problem known as adverse selection. They cannot use genetic tests but policyholders can ‚ÄĒ anyone who learns from a genetic test that he or she may develop a chronic disease has an incentive to buy life insurance. The risks are no longer being pooled as blindly as before.
Meanwhile, healthy people have an incentive to shun insurance. If someone‚Äôs genetic test shows that she is at low risk of disease, it may be more rational to buy a fitness device at full price than to take a life policy subsidising the purchase of an Apple Watch. Instead of paying insurers to share her risk with others, she can cover herself.
No matter how societies act, health risks will steadily become easier to identify and more personal. Duncan Minty, an adviser on insurance ethics, writes of ‚Äúa contraction of the risk pool to one‚ÄĚ, which would remove the point of traditional insurance policies entirely. Even if the number in the pool remains higher, health scores could easily become like credit scores, with everyone given an exact rating.
Life insurance can grow more personalised while remaining recognisably insurance, but it eventually becomes something else ‚ÄĒ a financial product based on an individual profile, rather than a pool. If that happens, the price of coverage for the unhealthy, unfit and disadvantaged will rise steeply, while the fittest and healthiest (often on higher incomes) will gain.
When they knew little of the life chances of individuals, insurers had a simple business. Technology is taking their ignorance away.