An interesting article on pondered how Google might approach insurance. The premise, which the article calls ‘emergent knowledge’, is that through Google’s expertise in mapping data, its access to huge quantities of structured and unstructured data about an individual, and its ability to layer this to provide unique and individualized knowledge, Google will be able to underwrite a risk with incredible accuracy.

The article goes on to suggest that this will be a game-changer; the trend by insurers to price a risk based on smaller and smaller pools of risk, will be accelerated to the point that Google will be able to confidently cost an individual risk – no need for pooling. This will indeed be a game-changer if it comes to pass, but is it good for the industry? Moreover is it good for Joe Public?

Is it the end of the road for general insurance? 

It does highlight a major crossroads for the industry, which could fundamentally change it, and at worst wipe out general insurance as we know it. The issue which emergent knowledge highlights is this:

The richer your knowledge of an individual risk (individual being the key word here), the more accurately you can price the risk. That degree of accuracy means, potentially, you can offer a policy at a much lower premium because you are not factoring in a pooled risk. The question is; is this still an insurance policy? If the ability to harness data in this way allows you to assess the risk with hitherto unachieved accuracy, you are in fact now predicting a claim - both when and what size. The implication is that you no longer have an insurance policy; you have a cost of claim policy.

So what's the problem? 

This presents two problems: the first is, what if I am high risk? My policy is about to shoot up in cost. Society may consider this acceptable for people that consistently cause motor accidents, but there are many other scenarios where people will be unable to afford cover owing to circumstances beyond their control.

Increased incidence of flooding in the UK is a good example of this. Many homeowners have found their premiums rise exponentially as the risk of flooding in their area increases. The need for Flood Re is in part a consequence of climate change, but it is also a reaction to improvements in underwriting which have led to smaller pools of risk. Under the model Google may be heading towards (according to the article), these pools shrink to the size of the individual risk. Individual homeowners become responsible for their risk individually. It is not their fault that the risk of flooding has increased where they live, but the emergent knowledge concept will punish them anyway. 

The second problem is that if what I am being offered is, in reality, a cost of claim policy, I could be better off keeping the premium myself and put it aside for when the risk turns into a claim. Technically, I am self-insuring anyway, so what is the benefit of lending the premium to an insurance company? I can earn on the capital, and the risk may take longer to materialise than the modelling predicts. In that case, I may be prepared to pay my insurer for my personalised ‘emergent knowledge’, but a policy is not going to look worthwhile. 

But fear not.. for now. 

One search on the aggregator of your choice for a policy, will tell you that we are of course many years away from my Doomsday scenario. That said, it would be a brave person to bet against a business like Google finding a commercial opportunity for this level of individual insight, at some point in the future. The question then, is what should insurers be doing to prepare for this technological and cultural change? 

The big mistake would be to use this insight purely to determine an underwriting decision – this will just drive a race to the bottom, and create problems for the industry from which it will struggle to recover.

I think the real answer is that insurers must embrace the opportunity to have unparalleled insight into its customers, and use it to drive real and meaningful engagement – let customers feel that you really know them. The competition is not Google moving into insurance, but other service industries winning the loyalty of customers purely because they have taken time to understand them.

The nature of general insurance will undoubtedly change over the coming years; insurers need to move up the value chain, and not allow new entrants to push them in the opposite direction. Knowing your customers as individuals has to be the foundation.

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