by Andrew White | September 25, 2017 | Comments Off on Insurance as a Service?
There was an interesting article in this week’s Economist (US print edition, Sept 23-29) titled, Real-time insurance – Pay-per-risk. The article explores newly emerging firms that represent a new business model that upends the current vastly entrenched insurance market. Today, insurance is based on risk-analysis of groups of individuals. Think of healthcare: Insurance “works” for insurer (e.g. Profits) and insured (e.g. Funded coverage for those unlucky enough to fall ill) when a large enough population of folks are grouped and a risk-balanced premium is levered to all members. The sick should be fewer than those that are not. Thus the pool “funds” the claims and ideally leaves enough for the insurer to make a profit. If there are more sick people than expected, the insurer loses out; if there are less than expected, everyone wins (perhaps the insurer more than the insured).
The problem with this system is well known – how to fairly create the groups upon which the risk analysis is determined. You have only to look at the Affordable Care Act (ACA) or Obamacare to see how this process breaks down all too easily. Many health exchanges have collapsed or withdrawn from the system since too many high-risk people exist in certain pools as a percent of those that are healthy. Such an imbalance leads to payments to those insured in excess of profits needed from those paying in that never claim. That difference, in the case of the ACA, is being made up by Uncle Sam in the form of contributions from the Federal government which are not transparent to the market. The result is a distorted market that is inefficient.
The new business models explored in the article is a good example of the potential that may change our economy overall. With the dearth of data becoming so great about individual activities, the ability to determine risk is improving dramatically: We can now find out so much more about what we do, what is good for us, and what is not. Add to this the new algorithms and processes that speed up the analysis itself, you get a perfect storm. The combined result is the emerging ability to price a risk for an individual, even at a point in time. The promise of insurance-as-service, geared to an on-demand model, is fast approaching. Indeed the firms mentioned in the article seem to be challenging traditional annually grouped price-based approaches today. This represents disruptive change to the market.
The idea that data is driving the digital revolution all around us is not new. In fact we have been heading in this direction for a long time. The Internet of Things simply blows the doors of what we used to call, big data. What was first an anomaly is now a virtually assured opportunity for most of us. We simply have to figure out a way to leverage this new data, and analytics, based opportunity. The “as-a-service” approach to delivery and fulfillment plays into the hands (and minds) of the millennial too. If only we can get them out of bed and up early enough to notice what’s happening!.
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