Big Brother watching insurance claims

GPS technology, RFIDs and genetics advances could all reshape the insurance business

By Richard Watson

What will the insurance industry look like in the future?  Nobody knows for sure, but the technology that is transforming retail banking is also capable of transforming insurance in the sense that GPS (global positioning system) embedded devices and RFIDs (radio frequency identification devices) will allow insurance companies to price risk in real time.

They will know where you are and will thus be able to cost insurance by the minute, which will open up a whole new market of instant cover insurance. For example, if you are worried about getting aboard a particular chair lift whilst on a skiing holiday at Falls Creek, you could buy additional insurance to cover the five-minute trip instantly through your mobile phone. Equally cars could be sold with insurance embedded into the vehicle or you could top up your level of cover at the local Shell station. Payments would be made on a per-mile basis depending on time of day, location, speed and traffic conditions.

The annual cost of compensation in the UK stands at £10 billion, most of which is billed straight to the taxpayer. Insurance claims have been rising at around 15 per cent every year largely due to an increase in litigious attitudes - the belief that if something goes wrong it is always someone else’s fault.  But many of these claims are bogus and anything that can reduce the amount insurance companies pay out or can assess risk more accurately will be welcomed with open arms.

Insurance will also be personalised in the sense that it will be tied to our individual actions. Three insurance companies in the US, UK and South Africa already do this, the idea being that the healthier you are the smaller your insurance premiums become. PruHealth UK offers ‘vitality points’ to customers who join a gym, give up smoking, improve their body-fat index or read books about keeping fit. Discovery Health in South Africa and Destiny Health in the US offer similar ‘cash for health’ policies. Given that car insurance companies have been offering discounts to safer drivers for years it’s surprising that nobody has thought of this before. So what’s next?

Perhaps governments will link personal income tax rates to an individual’s health or lifestyle – if your waistline goes down so too does your annual tax assessment. Somehow I think I preferred it back in the old days when I could go to the Hero of Waterloo pub at The Rocks in Sydney, and the government, my doctor, social services or my health-insurance company didn’t know I was there.

In theory our modern world, with all its anxieties and new risks, will be a bonanza for the insurance companies although too much risk could sink them too. For instance, the level of terrorism in Iraq means that insurance for foreign journalists is now so high that it’s almost unaffordable, while global climate change and severely unpredictable weather could hit insurance companies very badly indeed. In the UK, for example, weather related insurance claims cost £825 million per year, and have exceeded £1 billion in four out of the last 15 years.  Indeed, estimates suggest that ‘excessive heat’ costs the UK economy £3.9 million for each day above 32°C and £8.7 million for each day above 37°C.  It will be a similar story in Australia in the future, although drought related risk will also feature strongly.

Another issue relating to the future of insurance is genetic privacy.  Genetics is hardly a new issue but a series of recent discoveries linking certain genes to specific medical conditions such as type II diabetes, coronary heart disease, MS and rheumatoid arthritis has re-ignited the debate. Moreover, we are starting to see companies offering genetic home-testing kits direct to the public, effectively cutting out the medical middle man; this is a good example of an area where the law hasn’t yet caught up with new technology. 

For example, some tests have shown that 5-15 per cent of men listed as the father on the birth certificate aren’t the biological parent. So imagine when this particular test is offered over the counter at your local pharmacy. The good news is that genetic testing offers us a future where medicine is tailored to the individual and where treatments are personalised to give maximum effect and minimum side effects. Such treatments will clearly revolutionise the health and healthcare insurance industries, although at this stage it is impossible to predict what the overall societal consequences will be.

According to a recent survey, the vast majority of Americans are in favour of a law that would protect genetic privacy. The fear here is that employers, and especially insurance companies, could get hold of genetic data and this would influence decisions relating to employment and healthcare. However, insurance companies have exactly the opposite fear – that allowing individuals access to this data could mean that some individuals will drop coverage whereas others increase it without their insurance company knowing. This could, in turn, pollute the risk pool and lead to a collapse of the entire health insurance industry. This is unlikely but it’s not impossible.

So it looks like insurance isn’t going away any time soon, any more than retail banking. Indeed the insurance business will grow significantly in the future in response to new risks and fears, although quite what companies and individuals will be insuring themselves against in the future is so far unclear.

Richard Watson is the author of Future Files: A History of the Next 50 Years,
published on September 3 by Scribe. He is also the author and publisher of What’s Next, a quarterly report on global trends. His website is www.nowandnext.com